When the Bitcoin cryptocurrency emerged, many, including established experts, disregarded it as a short-lived fad with little substance besides misplaced hype. This sentiment has been periodically revisited throughout the years when Bitcoin slumped down in price.
By now, however, the enduring presence of the crypto sector has been accepted, and cryptocurrencies have become a fixture in modern society. After all, over a decade later, Bitcoin has claimed a high of $64 000 and is currently sitting at nearly $50 000 per 1 BTC. Other cryptocurrencies such as Ethereum and Monero have also managed to find mainstream support, expanding the pool of recognizable cryptocoins.
Despite the increased appeal and exploding number of people that either invest in cryptocurrencies or ‘mine’ for them, i.e., use computer resources to create new units of a chosen cryptocoin, regulators have been slow to catch up. In the last couple of years, individual countries have started the process of categorising and enacting a regulatory framework encompassing the cryptocurrency sector. Still, so far, there is no unified solution.
Neither the IFRS (International Financial Reporting Standards) nor GAAP (Generally Accepted Accounting Practice) reference cryptocurrencies specifically. To remain compliant with the current accounting and tax laws, individuals and companies in the UK that are active in the crypto sector should consult a specialised and professional UK crypto accountant service.
Examining Cryptocurrencies In Accounting
Classifying cryptocurrencies using the established accounting standards presents a complex challenge. Despite their umbrella term, the various crypto coins are not considered to be equivalent to a currency as they fail to meet multiple requirements. Indeed, a cryptocurrency’s central thesis is to be decentralised and unregulated, while a domestic or international currency must have governmental ownership.
According to the ICAEW (Institute of Chartered Accountants in England and Wales), the digital cryptocoins cannot be regarded as cash either because they are not legal tenders and are subjected to significant risks of changes in value. Indeed, the sector as a whole is inherently volatile and prone to rapid swings in value.
The closest fitting option is treating them as intangible assets. The definition for what constitutes an intangible asset under FRS102 (the principal accounting standard in the UK) is ‘an identifiable non-monetary asset without physical substance.’ Cryptocurrencies also possess the major requirements for an intangible asset. They do not have a physical substance, can be separated from the entity, and can be sold via a cryptocurrency exchange.
Taxes On Cryptocurrencies in the UK
Currently, the HMRC (Her Majesty’s Revenue and Customs) doesn’t have specific cryptocurrency tax legislation. At the end of 2019, internal guidance regarding transactions using crypto coins was issued, but no legislative actions supporting it have been enacted. Still, the HMRC guidance agrees with ICAEW and views them as intangible assets. However, it is essential to establish a difference between trading and non-trading activities in the crypto sector as that will affect how cryptocurrencies are treated under the UK’s tax law.
To discern which applies in a particular case, HMRC suggests using the approach currently in place for shares, securities, and other financial instruments. While businesses might rarely meet the needed criteria to treat their cryptocurrency activities like trading, it could be appropriate under specific circumstances. For example, cryptocoins generated through ‘mining’ may be treated as a trading activity for tax purposes. Do not simply assume that this will be the case. Make sure to first consult a crypto accountant firm that is monitoring the latest developments regarding the crypto sector.
Do You Owe Capital Gains Tax?
If the cryptocurrency activities of an individual or a business fall under the non-trading classification, then a capital gains tax will be incurred on the disposal of the assets. If you hold the crypto coins without disposal, no tax will be due. Keep in mind that exchanging one cryptocurrency for another will be considered as disposal. In addition, individuals will have to report any applicable capital gains tax in their tax returns.
Trading activities fall under a different cryptocurrency tax regulation. Individuals will be required to pay an income tax instead of capital gains tax. On the other hand, businesses will need to reflect profits or losses from their cryptocurrency trading as part of the trading profit and not as a chargeable gain. Following the HMRC suggestions also clarifies what costs could be deducted from disposable proceeds in calculating the applicable capital gain.
The cryptocurrency sector has proven that it is here to stay, and according to certain estimates, it has already surpassed $3 trillion in total valuation. Governments and regulators are starting to recognize the need for unified standards and specific legislation but are still slow to make any concrete moves. As a result, the services of specialised crypto accountants will become even more essential with time.