Investing in Cryptocurrency - What is my Tax Position?
Cryptocurrencies are beginning to gain notoriety at an increasing rate and have become the source of much controversy.
The most well-known cryptocurrency, Bitcoin, came into existence over 12 years ago and has recently made headlines due to the impressive appreciation in value over the first part of 2021. Alongside Bitcoin, various other cryptocurrencies have emerged such as Etherium and Litecoin and exist in the form of a digital ‘token’, rather than a physical currency with which we are all familiar.
Such currencies have attracted the attention of tax authorities around the world and represent several new challenges to their efforts in countering tax evasion. This is largely because the infrastructure that supports the use of cryptocurrencies is heavily decentralised and lacks the necessary audit trails to attach ownership and transfer activity to individuals and businesses.
Cryptocurrency as an Investment Vehicle
Many have come to identify cryptocurrency as an investment vehicle. Its history demonstrates that holding what has become known as ‘cryptoassets’ can be particularly profitable. For such investors, understanding one’s own tax liability isn’t entirely straightforward as even tax collection authorities such as HMRC in the UK are still in the process of refining their own position on what is a relatively new investment activity.
In the UK, holding cryptocurrency as a personal investment is likely to mean paying Capital Gains Tax on the profit made. There may also be further taxation such as Income Tax and National Insurance but this will depend entirely on matters surrounding the volume of trades and how the currency is used amongst other things.
As technology evolves and the use of cryptocurrencies becomes more mainstream, a more clear position will be reached but in the present climate, it’s important to seek specialist tax advice if you intend to embark on any kind of investment strategy that involves cryptocurrencies.
For more information, download our free guide to Capital Gains Tax.