Cryptocurrency – Is it the future?

In line with DJ Tiesto’s new song ‘Let’s get down to business’, the hot topic of Cryptocurrency is here again which has seen large gains in 2021. It is very much in everyone’s mind with some notable events this year. There was the announcement that Elon Musk’s company Tesla has invested $1.5 billion of their cash reserves into Bitcoin as part of their diversification strategy. This led to the price of Bitcoin jumping up to $44,220 a record high, a stark contrast to in 2010 when you could buy bitcoin for as little as $0.10. However, the announcement has led to worldwide speculation and a change that will impact our future.

More recently Coinbase, America’s biggest crypto-currency trading platform, has listed on the Nasdaq exchange and the first of its kind to go public, taking advantage of the rise in crypto-currency in a bull market. As well as Southampton Football Club now offering bitcoin as bonuses to their players for their performances as part of a new sponsorship deal.

Bitcoin has recently topped $63,000, its a record high but is now currently valued around the $45,000 mark after a price correction and the announcement Tesla have stopped accepting bitcoin payment citing environmental reasons. It has still seen large gains this year, so why is there more confidence now that cryptocurrency is becoming corporately accepted and going mainstream?

Imagine paying for accountancy services, cars and even food in Bitcoin, it’s unprecedented. The payments merchant, PayPal lets customers buy and sell Bitcoin as well as use it to pay suppliers. Even some pubs, cafes and businesses accept cryptocurrency as payment, as we begin to see a new trend towards this digital currency. But is this the future and what are the tax consequences for investing?

Back to basics – what is cryptocurrency?

Cryptocurrency is essentially digital monies and is therefore intangible. The most well known is Bitcoin which was introduced in 2009 but there are others such as Ethereum, Litecoin and Dogecoin.

They use decentralised technology in order for users to make secure payments and store money within a ‘digital’ wallet without the need to use their name or go through a bank. Most of these digital assets are secured via a pin that only you will know. All transactions made by currency holders are distributed on a public ledger called Blockchain. No one person or entity controls the blockchain, however due to its decentralisation it allows everyone to see, access and update the register constantly with new transactions.

Should I invest?

Now I must stress that Elon Musk has invested ‘spare’ cash which means as a gambling term, they are prepared to lose or make a loss on this investment. They are taking a risk in a digital currency whereby it is unregulated, and the price depends on a multitude of factors. This can be from demand, supply, announcements (from social media), celebrity endorsement or big corporates investing in the market.

Cryptocurrency is one of the most volatile and high-risk investments out there because no one is sure where it is heading and the price can crash at any time.

To put it into perspective, if Tesla cash out their investment now, already making a large gain, then the price of Bitcoin may tumble due to lack of other corporate players and signs of market weakness. The Microsoft president has already announced they will not be following Tesla’s bitcoin investment strategy in the short term. And I’d be interested in Apple’s stance on cryptocurrency too given their large cash reserves.

Another warning is timing as a lot of people, hard hit by the pandemic, have seen the potential for large gains and are looking to invest in the likes of Bitcoin for a ‘quick win’. Also beware of the scams as a lot of firms are preying on the vulnerable to invest in cryptocurrency via phishing emails and fake celebrity endorsements. Please do protect yourself and seek financial assistance if you are looking to make an investment.

Is Cryptocurrency becoming mainstream? What are the issues?

This question has been asked numerous times but this time it is different. There are now big corporate players involved and the ability to pay for items through cryptocurrency is enhancing its reputation.

Most still view cryptocurrency as an investment due to its high risk. HMRC still have the view that Bitcoin and cryptocurrency, even though termed digital currency, do not have the status of currency or physical money yet so are still treated similar to shares and securities. As cryptocurrency gets more widely used in purchasing goods and services, I feel HMRC will need to change their stance on this. This is because every purchase paid for in say bitcoin, would be seen as a disposal and subject to capital gains tax. There needs to be a simpler way to record these transactions which HMRC will need to assess going forward, amending their stance and possibly recognising it as a physical currency in some form. In its current form, most people will still view cryptocurrency as an investment opportunity.

Having said that, there are pieces of software out there now that can track all your cryptocurrency transactions and calculate your overall taxable gains for you over the given tax year. As software seems to be embracing this change, there may be an argument that HMRC may not need to change their stance.

Another key issue is regulation. Cryptocurrency is not fully acknowledged by all and I think a lot of it is down to the authorities not fully understanding how it works. Banks are sceptical and reluctant to accept clients who trade or hold this form of currency. There also needs to be international agreement to how cryptoassets are treated so there is consistency on the approach, which unfortunately is not clear yet. The UK have developed a taskforce on this, as well as set up a government backed digital currency, so events are in motion.

Finally, there has been a small change in the Budget whereby HMRC have been issued with new investigatory powers so can demand to see investors bank statements and digital wallets in a crackdown on any tax evasion and avoidance with regards to cryptocurrency transactions. This has all been detailed in their published cryptoassets manual on the 30 March 2021.

What are the tax consequences for an individual?

With most cases, individuals will be holding cryptoassets for personal investment rather than other means so are subject to capital gains tax when they dispose of the asset. However, there will be instances where you will be subject to income tax rates such as a gift of cryptoassets from employers, regular trading of cryptoassets and also from ‘mining’ new cryptoassets.

As a personal investment it will be similar to holding shares whereby there is no tax charge for an individual until they eventually dispose of the cryptocurrency and this will be subject to capital gains tax. There is no need to record any gains or losses on your personal tax return until you eventually sell the asset in the given tax year. But please do keep a record of the cost and date of when you purchased all holdings of cryptocurrency, as well as any relevant costs associated with it, including legal and transaction costs. HMRC have also confirmed that the cost of the currency when you have made a disposal is pooled so your gains may be different to what you expect.

Each individual is entitled to an annual CGT exemption (£12,300 in 2021/22) and then taxed at 10%/20% depending on what rate taxpayer you are (2021/22 rates). However please note these rates may be subject to change in the future as the Government looks at aligning the capital gains rates with the income tax rates as part of their plan to recover some of the deficit caused by Coronavirus.

Tax consequences for a company

The other side is investing in Cryptocurrency holdings through a company. Again, this will depend upon the nature and intention of holding in whether the company is looking for an investment or perhaps as part of trading the exchange tokens which is covered separately by HMRC.

In most cases, companies will be holding cryptoassets as an investment so they will be taxed when they dispose of the assets as a chargeable gain and subject to corporation tax (CT) (19% for 2021/22). Again, please note the CT rate will rise to up to 25% for some companies from 1 April 2023.

What’s next for Cryptocurrency?

Cryptocurrency is here to stay but the risks in investing are as clear as mud. In a volatile market based on demand it is very high risk and needs careful planning and consideration and also depends on the risk appetite of the investor.

We have started to see that the markets are reacting to Elon Musk in not just his tweets but to the company’s standpoints too as we still do not fully understand the environmental impact of mining these cryptoassets.

When Tesla invested, they did not do this on a whim. They had a team of financial advisers, bankers and accountants working round the clock to assist them with this strategy. However, with all the advice in the world the decision will always rest with you.

2021 has been the year and rise of cryptocurrency, there needs to be some further changes in regulation and acknowledgement to get it mainstream but all I can say is watch this space…

If you would like advice on the tax implications, please don’t hesitate to get in touch with us here.