Your crypto questions answered
Q: How is crypto different from stocks?
While both rise and fall with supply and demand, purchasing crypto is buying into a piece of digital currency, not a business.
Q. How is crypto produced?
People mine crypto. Instead of digging, it’s done via people using their computers to solve complex equations, producing new crypto
Q. What is blockchain?
Think of it like a digital bookkeeper. It is a running log of every crypto transaction, keeping track of who owns what through a computer network.
Q. What keeps crypto protected?
Blockchains store data using very complex maths, or “encryption," that makes it nearly impossible to corrupt or change the transaction records.
Q. Understanding volatility and risk
Crypto is considered volatile because of how much and how quickly its value can change. There is the potential for gains and losses, with the possibility you could lose the entire amount you paid.
Q. Crypto Myth: Crypto is tax free
Contrary to what you may think, if you sell and trade in any cryptoasset, a tax event may occur.
An exchange of one token to another could trigger a tax event.
That is why it is important to keep good records so you can track your crypto transactions and if you are proactive you can manage any tax liabilities.
For example, you may decide to hold off completing any transactions near the tax-year end if you already have a big capital gains liability and push to the new tax year to make use of your annual allowance, or your annual capital gains tax relief, currently set at £12,300 in the tax year.
The general tax rule is that if you receive crypto in exchange of a service, this is considered as income and taxed accordingly - either as income and national insurance contributions if receiving personally or a partnership or corporation tax under a limited company.
Q. Is your crypto activity a hobby or are you on active trader?
This is an important from an accounting and tax perspective.
For example, buying and selling NFTs, are you doing this on a day to day basis? For example, are you trading on a regular basis, making profit etc? This could be perceived as trading.
Alternatively, you may invest in crypto and hold it for a period of time so it appreciates in value. This could be interpreted as a hobby and investment versus active trading.
Once you determine which you are, you can decide how you conduct crypto transactions in a tax efficient manner. You may potentially want to consider a limited company structure or partnership to save on potential tax liabilities.
Q. HMRC stance on crypto
There is not a crypto tax in the UK, rather HMRC have published a crypto tax manual since 2016. Since then, HMRC have made changes and have done so out of nowhere at times, so the crypto tax landscape is evolving all the time.
As the crypto manual looks to determine which of the existing UK taxes are relevant, the guidance in the manual is open to interpretation, there are no clear taxes case or laws that we can currently refer to.
It’s always a good idea to seek professional advice to understand your tax position. Please get in touch to see how we can help. Mirandus are chartered tax advisers and chartered accountants and well placed to help.
