A particular kind of virtual asset that is secured by cryptography is cryptocurrency. Usually, a blockchain system is used to track and maintain a history of transactions. Since cryptocurrencies like Bitcoin and Ether are decentralised, they are not backed by governments, central banks, or other central institutions. There are several ways to acquire bitcoin, and new ones are constantly being created. Cryptocurrencies may be used for a variety of purposes, including investing, paying bills, and purchasing items. Cryptocurrency transactions frequently have tax repercussions.
Why it’s important to value your cryptocurrencies for tax purposes
An organization’s exchange token activities are subject to taxation.
Such actions consist of:
- Trading in exchange tokens
- Trading tokens for other assets, such as other kinds of cryptocurrency,
- “Mining.”
Trading of products or services for exchange tokens
The nature of the tax owed will be determined by the nature of the firm and its operations, including whether or not they qualify as a trade.
They might be responsible for any of the following costs:
- Tax on Capital Gains (CGT)
- Corporation taxes (CT)
- Gains Subject to Corporation Tax (CTCG
- Income Tax (IT)
- Contributions to National Insurance
- Stamp Duty
- VAT
A company’s revenue, expenses, earnings, and gains will determine how much tax it must pay. These must be reported yearly to HMRC on one of the following:
- The individual’s self-assessment tax return; or
- Business tax return (for companies).
HMRC will evaluate each individual case based on its unique set of specifics. To assess the appropriate tax treatment, it will use the applicable laws and case law, as well as, if applicable, the contractual conditions controlling the exchange tokens.
Valuation of cryptocurrencies for commercial use
Taxable profits for both individuals and businesses will be determined in British pounds. Exchange tokens, including bitcoin, can be traded on sites that might not accept British pounds. The transaction must be converted to pounds sterling using the appropriate exchange rate if it does not have a value in pounds sterling (for instance, if bitcoin is traded for ether).
For the purpose of completing a tax return, the value of any profit or gain (or loss) must be translated into pounds sterling. Any profit or gain must be computed using the correct exchange rate at the time of each transaction to convert to pounds sterling. An adequate appraisal for the transaction must be determined with due attention utilising a reliable approach. The appraisal process must be documented by both individuals and businesses.
A firm has the option to choose another currency to serve as its functional currency. In these cases, it is necessary to convert the transactions into functional currency at the correct rate at the time of each transaction. The actions required to finish the tax return in pounds sterling must be taken at the conclusion of the accounting period. CFM64100 has further information.
Profitability analysis in business accounting
Profits from the sale or exchange of crypto assets must be determined in accordance with GAAP, subject to any adjustments necessary or authorised by law. This applies to both individual and corporate taxpayers.
The terms “GAAP” and “Generally Accepted Accounting Principles” are both used when discussing tax implications
- Accounting rules that are generally accepted in the UK (UK GAAP)
- Generally Accepted Accounting Principles in Relation to Accounts Prepared in Accordance with International Accounting Standards (IAS) for Companies and Other Entities.
If tax law mandates or allows for an alternative basis of computation, then that is what must be done.
Regulation and anti-money-laundering
Starting on January 10, 2020, the Financial Conduct Authority (FCA) will be in charge of supervising firms in their efforts to prevent money laundering. The rules established by the 2017 Money Laundering, Terrorist Financing, and Transfer of Funds Regulations, as modified (referred to below as the new AML legislation). The scope of regulation includes the following actions:
- Cryptocurrency exchange service provider
- Cryptocurrency ATM
- Peer to Peer Companies
- Releasing fresh crypto assets
- Providers of custodial wallets
Under the new AML regulations, these types of businesses will be considered “obliged entities,” bringing them into line with more conventional financial institutions like banks. This implies that organisations operating in this field must take steps to prevent money laundering. A few illustrations are:
- Get to know your customers by performing KYC (Know Your Customers) procedures
- Constant checks to make sure financial dealings line up with what the company knows about the client, the client’s industry, and the client’s risk profile
- Suspicious Activity Reports and other means of transaction monitoring and reporting
- Make an effort to discover and evaluate any money laundering dangers.
