Cryptocurrencies (crypto) such as Bitcoin and Ethereum have generated much interest in recent years. Their rapid increase in value (and volatility!) has also attracted regulatory scrutiny, and as accountants, we keep a close eye on this.
What is Cryptocurrency?
Crypto is a transferable digital ‘token’ or ‘coin’ with varying rights for buying assets and services. The owner of the crypto has a key that gives control of the token. The technology used to record this and any transactions is called ‘Blockchain’, or distributed ledger technology.
They function as a medium of exchange and operate independently of any central market. Among the products that can be purchased today using crypto include luxury watches, electronics and even cars.
In February, Tesla announced a $1.5bn purchase of Bitcoin and would start accepting Bitcoin as a payment method for its products.
It’s a fast-evolving market! And one that can be affected very quickly. Only last month, the price of crypto was pushed up after positive tweets about the currency by Tesla’s billionaire CEO, Elon Musk.
How to account for cryptocurrency in accounting
There are no specific accounting standards that directly address cryptographic assets, so to approach this, we must look at existing standards and apply an approach based on principles.
Trading in crypto is now attracting the attention of HMRC, so it’s worth speaking to specialists if you plan to invest and/or generate capital or revenue returns.
The volatility of crypto makes it challenging to value and calculate profits at any given time. Crypto trades on exchanges that do not use pound sterling (or any other regulated currency as the value, so establishing value and, therefore, profits/losses can be challenging.
Tax on cryptocurrency
Most investors will be subject to Capital Gains Tax on any profits from crypto (in a similar way to investing in shares). In some instances, the activity may be deemed to be trading and therefore treated as income and subject to Income Tax and National Insurance.
If you are investing or trading in crypto or are planning to, our experienced team can guide you through the unique challenges from an accountancy and tax perspective.