Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
Whether you are excited, worried, or confused by cryptocurrencies, you will almost certainly have heard a lot about them in recent times. Bitcoin has even been adopted officially as a legal tender in El Salvador, and companies are now starting to hold and accept various cryptocurrencies. Adoption of crypto is expanding all the time, and more businesses are sure to soon begin acquiring digital assets, raising the issue of how they should be accounted for.
Although the origins of cryptocurrencies date back to 1982, it has only been a few years since they hit the headlines. While initially, only a few hardcore investors were keen to sink their money into crypto purchasing, now, more and more people are recognising the potential of investing in crypto. As a result, more queries are being raised about how cryptocurrencies are handled for tax purposes within the UK.
If you are a new UK investor in cryptocurrencies, the tax position often seems very unclear. For many people, this area remains unfamiliar since cryptocurrencies have only become mainstream in the past few years.
If you are an investor in cryptocurrencies who has made some impressive gains from the investments you have made, you need to have a clear understanding of cryptocurrency taxation and how accounting is handled in this respect within the UK.
The Problem Of Cryptocurrency Accounting
At the present time, neither the International Financial Reporting Standards (IFRS) nor Generally Accepted Accounting Practice (GAAP) in the UK reference cryptocurrency accounting specifically.
Nevertheless, the ICAEW have issued their own statement, having published their technical note in 2018 on this subject in which they suggested several potential cryptocurrency accounting treatments under FRS 102 – the main accounting standard within the UK’s financial reporting regime.
It is the ICAEW’s viewpoint that the company’s business model as well as the intended use of the held cryptocurrencies are considered as a starting point when determining the most appropriate accountancy treatment for cryptocurrencies.
Cryptocurrencies – What Are They And How Are They Accounted For?
One of the reasons why cryptocurrencies are so difficult to understand when it comes to tax and accounting treatments is because their status remains fairly unclear.
Cryptocurrencies may be similar to cash, but they do not fall within the definition of cash under FRS 102. Crypto is also not legal tender.
So, is crypto considered to be a financial instrument?
Although cryptocurrencies are, in a few cases, acceptable in exchange for services or goods rendered, they are neither cash, nor give the holder rights to cash. So, crypto fails the benchmark set out by FRS 102 relating to financial instruments and it therefore cannot be classified under this category.
So, can cryptocurrencies be classed as inventory?
The term “inventory” is used to include items that are held before being sold on. Therefore, depending on the way in which a business intends to use cryptocurrencies, they may fall in this bracket.
As an example, if a business plans to buy then sell crypto frequently enough to mean crypto trading is part of its ordinary business activities, inventory is an appropriate classification. In such cases, crypto should be held either at cost i.e., the value of the money that was exchanged initially to acquire the cryptocurrency, or the price it is estimated to sell at i.e., the value it will be sold at that is likely to have its basis on the current market price – less the costs for completion and sale, whichever of the two is lower.
Then, the presentation would be in the balance sheet’s current assets section as inventory. In the company’s financial statement, the note to inventory in the balance sheet would reveal the inventory breakdown that includes cryptocurrency.
But what happens if you are not trading cryptocurrencies?
Inventory may not be the right classification depending on which way your business utilises cryptocurrency. If inventory is an inappropriate classification, you may find that a classification of intangible asset may be a better fit in accordance with the intangible asset description laid out under FRS 102.
Crypto meets the FRS 102 definition as it, due to being able to be sold on the exchange or exchanged for goods it is considered to be separable from your business, and it is also not present in a physical sense.
If cryptocurrency is held under the classification of intangible asset, its measurement basis is as follows:
Revaluation i.e., fair value with impairment and amortisation deducted.
Cost i.e., the value of the money that was exchanged initially to acquire the cryptocurrency with impairment and amortisation applied.
Before you make decide which of the above two options is appropriate for your circumstances, you should refer to section 18.18 of FRS 102 that allows the revaluation of intangible assets of when fair value is able to be determined from active markets that have prices that are available to the public, willing buyers, and contain homogeneous items. In the case of some cryptocurrencies this may be possible but not in all cases.
Two options also exist when it comes to presentation on balance sheets.
The first option is holding intangible assets as fixed assets.
The second option is holding intangible assets as fixed asset investments.
Under the terms of the Companies Act, both options are deemed to be equally acceptable. Therefore, the decision must be based on how your business plans to use crypto going forwards.
How Is It Disclosed In Financial Statements?
No matter which cryptocurrency classification you decide upon, you will need to have a clear policy for its accounting treatment.
Your accounting policy must set out clearly:
- The point where the crypto is recognised within your financial statements
- Your initial basis of measurement
- Your subsequent basis of measurement
Every further disclosure must be in accordance with the Inventories section 13 of FRS 102 or with the Intangible Assets section 18 of FRS 102 as appropriate. To ensure a fair and true viewpoint is given, additional disclosure must be provided too.
HMRC’s Internal Guidance
Similar to the accounting situation, HMRC has no specific legislation regarding the taxation of cryptocurrencies. In 2019, they issued guidance internally regarding the taxation of crypto transactions, but this guidance was given with no actual legislation to underpin it.
Similar to the ICAEW’s suggested accounting treatment, crypto is regarded by HMRC as an intangible asset. In a joint FCA, Bank of England and Treasury report, cryptocurrencies were stated to be not considered as currency as they are neither accepted widely as an exchange means, nor used as an account unit. They are also considered not to be a good value store since they are deemed to be too volatile.
Distinguishing between non-trading and trading activities is vital according to HMRC as this distinction affects how cryptocurrency is treated under the UK’s tax laws. To determine which is applicable, HMRC suggests that an identical approach is used to that when handling trades in securities, shares, and similar financial products.
It is believed by HMRC that businesses rarely meet all of the relevant criteria to treat their cryptocurrency activities as trading but in some circumstances, those criteria may apply. As an example, cryptocurrencies that have been generated via mining activities may be considered to be trading activities for purposes of taxation. It is, therefore, essential to obtain HMRC advice for your specific circumstances.
Paying Capital Gains On Cryptocurrencies
When cryptocurrency transactions in the UK are deemed to be non-trading, then they are subjected to capital gains taxation at the point of disposal. That remains true for businesses and individuals alike. In the case of individuals, this must be reported on a self-assessment return.
If cryptocurrencies are held without disposal, no tax needs to be paid on them. But if one cryptocurrency is exchanged for another, that is considered to be disposal. Taxation on that crypto exchange includes capital gains tax.
When activities are deemed to be trading, different cryptocurrency taxation becomes applicable within the UK. In the case of individuals, capital gains tax is superseded by income tax and is applicable to profits. In the case of companies, losses or profits from trading cryptocurrencies are not chargeable gains but instead are considered to be part of their trading profits or losses.
Cryptocurrency Tax And Accounting Within The UK
No one really knows how the future looks for cryptocurrencies. However, right now, their trading volume is more than $100 billion per day and their market cap is over $2 trillion. With this in mind, it is extremely likely that we will all see cryptocurrencies reported more frequently on businesses’ balance sheets in the years to come.
It is clear that cryptocurrency taxation within the UK remains an unclear and emerging area. Regulators may have provided guidance, but this advice remains in its initial stages and is likely to evolve with time.
If you hold cryptocurrencies, you should make sure that you are working with professionals who are experts in this specific field who are up to date and knowledgeable about the most recent updates to cryptocurrency taxation treatment.