Cryptocurrency is a relatively new phenomenon, but trading can be complicated, and it is important to understand tax liabilities.
Just like normal currencies, any income and profits on business can be subject to taxation, including income tax, Capital Gains Tax and National Insurance.
There are various methods of acquiring cryptocurrency that might make you liable to be taxed:
- As an employee, you received this from your boss as a form of non-cash payment
- Your business trades in crypto instead of a particular currency
- If your crypto profits exceed the allowance, you will be subject to Capital Gains Tax.
What is a cryptocurrency?
A cryptocurrency is a digital currency that allows interaction through a computer network that is not reliant on any central authority, such as a Government or bank.
There are many cryptocurrencies available, with the best known being Bitcoin, but others include Ethereum. Cryptocurrencies are increasingly popular alternatives for online payments.
They are stored on the blockchain, which is a decentralised database that stores information.
The difference is that it isn’t stored in a single location, but across a distributed network and available globally. Every time digital currency is transferred from one user to another, the blockchain is updated.
How do I store a cryptocurrency?
To use cryptocurrency, you need a cryptocurrency wallet, a cloud-based storage sitting on your computer or your mobile.
The wallets hold encryption keys that confirm your identity so take care when selecting it. Lose it and you lose everything as there is no backup.
In addition, cryptocurrencies are digital assets, so there is always a danger of hacking, and you should have a backup strategy in case your computer crashes or is stolen. If you lose access, you lose it for good.
When it comes to taxation, you can deduct certain allowable costs when working out your gain, including the cost of:
- Transaction fees paid before the transaction is added to a blockchain
- Advertising for a buyer or seller
- Drawing up a contract for the transaction
- Making a valuation so you can work out your gain for that transaction.
Using cryptocurrencies? For advice on tax liabilities, contact Shailesh Patel or Darren Buckley today.