Cryptocurrencies – My Two Satoshis

5th January, 2018

Cryptocurrencies are digital currencies created by code, and are mostly run on decentralised systems meaning there is no one entity governing that currency. They are operated by a string of encrypted data (the blockchain) which can be viewed by anyone but maintains user anonymity, making it near impossible to create counterfeit coins and provides very secure transactions.

Individuals can also invest in crypto tokens which are projects funded via an ‘initial coin offering’ (ICO) and will run usually on the Bitcoin or Ethereum blockchain.

Bitcoin and other currencies have a fixed supply and like gold, this helps to increase its value. However the market is much more volatile and is subject to sharp price moves.

Recent changes in technology have meant that some cryptocurrencies have developed further functionality and can now utilise the ‘blockchain’ to process secure smart contracts and programs for real business applications, with the currency acting as ‘fuel’ to carry out the transaction – adding the potential for further value.

Why the hype?

There have been huge increases in value throughout 2017 with many coins hitting ‘all-time highs’ over and over again. This has meant that there has been much publicity about the substantial gains made by early investors. The volatile market for cryptocurrencies has resulted in something of a frenzy with everyone looking out for the next big thing.

This all equates to a risky (though somewhat exciting) environment drawing in droves of global investors.

How are my crypto profits (or indeed losses) dealt with in the UK?

HMRC is taking the position that this will depend on the nature of your activities and that everyone will be considered on a case by case basis.

With the ever increasing global interest in this area it is likely that HMRC will start investigating investors’ tax affairs so it is important to ensure that your crypto transactions are dealt with correctly.

Bought, held as an investment and sold at a profit? A non-sterling currency disposal is treated as a capital disposal so your capital gains tax position will need to be considered.

This is also the case if you have switched or traded between coins and tokens.

Sold at a loss? Disposals of assets worth more than £44,400 must be reported. Remember any crypto losses should also be claimed on your return as these can be used to offset against any future capital gains.

A day trader or miner? HMRC may consider your activities to be a trade, subject to income or corporation tax. This may also have VAT and national insurance implications.

Our tax team has a number of specialists in this area who will be more than happy to assist and discuss your tax position.

The risks?

PKF Francis Clark does not give investment advice and neither we, nor Francis Clark Financial Planning Limited, will recommend or advise on any unregulated investment scheme such as cryptocurrencies. Should you independently decide to invest in cryptocurrencies, it is important to remember that in a volatile market, complete and permanent capital losses from such investments are entirely possible and as the market is not regulated there is no compensation fund to provide a safety net.

There are over 1,000 cryptocurrencies (a number constantly growing) available to invest in but few survive the first few months. Furthermore cryptocurrencies are not currently regulated, making market manipulated pumps and dumps a regular occurrence leaving some investors out of pocket.

The cryptomarket has been likened to the dot com boom and bust and many people are expecting a huge market correction which will leave many investors holding worthless coins.

One thing however is for certain: this is an area which will continue to grow and mature and we will keep you up to date on any interesting developments in future.

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