Cryptocurrencies for business: tax aspects to consider

For several years now, cryptocurrencies have become so popular that they are the subject of tax discussions in several sovereign states. What are cryptocurrencies? Cryptocurrencies (or tokens or crypto assets), are cryptographically secure digital representations of value or contractual rights that can be:

– Transferred;

– Stored;

– Exchanged electronically.  

There are several types of cryptocurrencies, which have different characteristics. The main ones are ‘Exchange Tokens’, ‘Utility Tokens’, ‘Security Tokens’ and ‘Stablecoins’. The treatment of cryptocurrencies differs according to the nature and use of the token and not the type of token. Cryptocurrencies are not recognised as currencies or coins, but as real assets. If a business buys and sells tokens, it will need to treat them as assets on which to charge taxes based on the type of transaction. The activities to be considered for tax implications are:

– Buying and selling token exchanges;

– Trading tokens with other assets (including other types of cryptocurrencies);

– Mining;

– Exchange of tokens for other goods or services.

The fees to be charged will depend on who is involved in the business and the activity. Depending on the type of transaction, one of these taxes may apply:

– Capital Gain Tax (CGT);

– Corporation Tax (CT);

– Corporation Tax Capital Gain (CTCG);

– Income Tax (IT);

– National Insurance Contribution (NIC);

– Stamp Taxes;

– VAT.

Taxable income will be determined by income, expenses, profits and capital gains. Therefore, they will need to be disclosed annually to HMRC through the tax return for companies or individuals. Tax calculations will be converted into sterling, but exchange tokens (i.e., bitcoins) can also be traded in a currency other than sterling and then converted by applying a monthly or annual exchange rate set by HMRC. Furthermore, it will be necessary to convert the value of any profit or gain into sterling when computing the tax return. A company can choose to trade in another currency, so transactions involving cryptocurrencies will need to be converted into functional currency. However, the final tax return must be submitted in pounds sterling. In terms of filing tax returns for companies and individuals, profits involving cryptocurrencies must be calculated according to UK GAAP, unless legislation requires or allows a different basis of calculation.  

Domenico Santomasi

Photo by André François McKenzie on Unsplash