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Cryptocurrency is the new buzzword, it’s the talk of the town. Whether you love them or loathe them, Crypto’s have taken the world by storm. Tax on cryptocurrency remains ambiguous.

What Is Cryptocurrency?

The word cryptocurrency originates from the encryption techniques used to secure the network. A cryptocurrency is a virtual or digital currency. They are a digital means of exchange, using cryptography as a means of security. Using this technology makes it very difficult to counterfeit. Cryptos are not produced by any centralised authority. This means governments are unable to manipulate or interfere with them. On the contrary, cryptocurrencies are decentralised networks using a technology which is known as blockchain. This is a distributed ledger enforced by a number of different computers.

Cryptocurrencies have won many plaudits for their transparency, portability, resistance to inflation and divisibility. They have however also faced criticism. There are vulnerabilities within the infrastructure that underlies them, their use for illegal activities and their constant volatility.

Are Cryptocurrencies Regulated?

The simple answer is they aren’t. The legal status of cryptocurrencies varies across the globe, with different countries having different rules. Whilst cryptocurrencies operate within the European Union, there are a number of countries that ban the trade of cryptocurrencies. Concern over the safety of cryptos has prompted the Financial Conduct Authority to describe them as ‘very high risk, speculative investments. They go to say, “if you buy… cryptoassets, you are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme”.

How do Cryptocurrencies Work?

The trade of Cryptocurrencies is underpinned by blockchain technology. They are virtual tokens, as opposed to a tangible, physical stack of currency in the form of notes. They are confined to the internet and their value is influenced by market forces generated by the people or traders who want to buy or sell them. Crypto’s can be purchased with cash

It is estimated there are over 5,000 cryptocurrencies in existence, with this number increasing all the time. The biggest is Bitcoin with a current market capitalisation of over $400 Billion. There are a limited number of Bitcoins that exist which makes them subject to the laws of supply and demand, similar to other assets such as gold. Other major cryptocurrencies include Ethereum and Ripple.

You can buy cryptocurrencies on specialist exchanges, trading platforms and apps. The majority of traders will use an online exchange. They use blockchain technology which is a public ledge of every cryptocurrency transaction that takes places. A record of these transactions gets shared across a number of computers that can’t be tampered with.

New units of cryptocurrencies are produced by ‘mining’. To ‘mine’ new currency requires a large volume of computing power and energy. This has raised huge concerns on the environment and has been widely publicised by the likes of Elon Musk.

How is HMRC’s View On Cryptocurrency?

It is estimated nearly two million adults in the UK own cryptocurrencies. It is suggested 75% of consumers don’t hold more than £1,000 worth. As such HMRC have produced the Cryptoassets Manual. They have also produced the Cryptoasset Taskforce report.

HMRC does not consider cryptoassets as currency or money. They confirm owning cryptoassets is not illegal in the UK and does not imply tax evasion or any other illegal activities.

HMRC classify cryptocurrency as cryptoassets. They define cryptoassets as ‘cryptographically secured digital representations of value or contractual rights than can be:

  • Transferred
  • Stored
  • Traded electronically

HMRC identify four main types of cryptocurrencies: –

  • Exchange Tokens
  • Utility Tokens
  • Security Tokens
  • Stablecoins

Tax On Cryptocurrency in the UK

HMRC are clear in their stance that anyone selling cryptoassets will be subject to capital gains tax (CGT) on their profits, and this will need to be reported on their self-assessment tax return. It is a common myth that cryptoassets or cryptocurrencies falls outside of the scope of taxation within the UK. Many people liken the trade of cryptos to gambling or lottery wins where the profit or gains aren’t liable for tax.

For UK tax purposes profits from a trade will be subject to capital gains tax. This is unless you are a classified as a ‘trader’. The definition of which is ambiguous and constitutes a higher level of frequency, organisation and sophistication in trading. If this is the case, profits are subject to income tax.

It is important to note tax is only paid on the gains you make when the cyptoassets are sold or traded, not the amount you have invested so far. If for example you hold bitcoin and there has been no disposal of these, not tax is due. On the contrary, if you have exchanged bitcoin for another cryptoasset, this would be a disposal of bitcoin and Capital Gains Tax would occur.

HMRC will receive information from crypto exchanges so it is important you calculate any gains arising from the sale or exchange of cryptoassets. Individuals have a tax-free allowance of £12,300 for the Tax Year 2021-22 (the same as the previous tax years). Any gains above this would be taxed at either 10 or 20% depending on the level of other personal income.

The big question that’s confusing everyone on tax on cryptocurrency, is how it’s calculated. Specifically how the gains from multiple cryptoassets and multiple complex exchanges over time are calculated.