Cryptocurrency and How To Account For It

Most of us have heard of cryptocurrency but understanding and approaching it using the right resources can be difficult. Cryptocurrency is a digital virtual currency which is processed through cryptography, enabling it practically impossible to imitate, counterfeit or double-spend. Cryptocurrency use blockchain technology which is a data structure that allows the creation of a digital ledger of data and to share it across a network of independent parties. This means it is decentralized and exists free from government control or sovereignty, unlike standard fiat money.

Through cryptocurrency, individuals and businesses can process secure payments online which are denominated in terms of virtual tokens, represented by ledger entries internally inputted to the system. This self-regulation, decentralized and democratic system has seen cryptocurrency evolve rapidly since the very first token, Bitcoin, was released into the ether. This happened in 2009 when a mysterious person named Satoshi Nakamoto created Bitcoin, its reference implementation and authored a white paper on the token. Nakamoto’s identity has never been revealed, with much speculation it’s a combination of people who use a pseudonym to detract attention.

Since then, cryptocurrency has grown into a monumental industry, with the market approximately worth over $2 trillion. There are now over 6000 different cryptocurrencies in circulation including Ethereum, Cardano, Tether, XRP, Dogecoin, Stellar and a whole lot more. Despite cryptocurrency’s rapid growth, there is still much concern about the nature of cryptocurrency specifically when it comes to the accounting and tax processes around it. We break down how to properly account for your crypto, how we at Nordens can help and why cryptocurrency is here to stay.

What Are The Tax Laws Behind Cryptocurrency In The UK?

If you’re buying cryptocurrency and selling at a profit, the tax laws surrounding it can be complex. It all depends whether you’re classed as a business or an individual and whether HMRC determine your crypto is an investment or you qualify as a crypto trader. This is measured on such things as the amount and frequency of crypto transactions, the time devoted to crypto activity, the length of time you hold instruments (whether they’re bought and sold within minutes or kept for longer), risk, commerciality etc.

If it’s determined you are in fact a business then any income made will be added to trading profits and therefore become subject to income tax. Fees or rewards for any staking activity will also get added, whilst reasonable expenses will be deducted. Any gain in value from the time of acquisition will also get added to trading profits, as well as standard National Insurance contributions.

If it’s determined you are in a fact an individual and treat cryptocurrency as an investment, then you will be subject to capital gains tax (CGT) when selling, exchanging, giving away or using crypto to pay for goods or services. If you fall within the higher or additional rate tax band (your income exceeds £50,271) then your capital gains tax rate will be 20%.

If your income falls in the basic rate (£12,571 – £50.270), the rate in which tax is calculated depends on your taxable income as well as the size of the gain (after any allowances get deducted). HMRC calculates this using a share pooling method, meaning the average of all acquisition costs sets out purchase cost of the crypto being sold.

Will Cryptocurrency Keep On Growing?

The short answer to this, is most likely. As standard fiat money and global banking infrastructure continues to be subject to issues, more and more people are choosing to enter the cryptocurrency realm due to its control, self-sovereignty and transparency. As well as this, the use of cashless and mobile payments are forever increasing, which of course strengthens the argument that cryptocurrency is the future.

Due to value of certain crypto coins hard to distinguish in fiat money terms, its volatility concerns people. However, the value of cryptocurrency continues to rise with many experts predicting we are only still in its infant stage. As more companies and organisations use blockchain technology to grow their offering and integrate into platforms, the technological knowledge of cryptocurrency will grow leading to more interest and investment naturally.

How Can Nordens Help With Your Cryptocurrency?

The number of accountancy firms dealing with cryptocurrency is extremely limited, due to the somewhat volatile nature of crypto and the fact that the tax laws can be confusing. Fortunately, here at Nordens we can help you with any of your cryptocurrency concerns or needs. Our team of crypto experts will help navigate the complexities in disclosing your cryptocurrency assets and gains, enabling you to be compliant and up to date with HMRC and its tax treatments on crypto.

As well as this, we’ll be on hand to research any new developments involving cryptocurrency to make sure we’re efficiently informed to offer you the highest quality of service and insight possible. Our cryptocurrency services include:

  • Crypto Tax Compliance & Reporting
  • Crypto Tax Planning
  • Crypto Consultancy
  • Crypto Wealth Management
  • Crypto Bookkeeping

We hope this has outlined to you the basics around cryptocurrency and why hiring an accountant for your crypto is of huge benefit. If you require any further information on our cryptocurrency services, or anything accounting related for that matter, please don’t hesitate to get in touch with our Client Success Manager, Sam Moss, at Alternatively, you can get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.