Bitcoin is arguably the biggest financial sensation in recent history. Today, there are hundreds of crypto assets and digital currencies in the market, but the nature of crypto and blockchain is challenging, and something that many people don’t fully understand. This is not just individuals, but governments too – governments across the globe find it difficult to comprehend the ins and outs of cryptocurrencies. All of this can make managing your crypto assets and your tax challenging.
Note that this article is not intended as financial advice – always consult with a professional regarding your individual situation.
Blockchain and the Metaverse
The scope of blockchain has expanded greatly in recent times. We’ve seen a rapid shift from purely hosting digital currencies to facilitating Non-Fungible Tokens (NFTs) and Metaverse (Virtual World) assets. In simple terms, blockchain is the decentralised register or ledger for all crypto transactions and NFT trading.
The Risk Factor
The extreme volatility of crypto markets attracts risk-takers. Experts and crypto geeks look for the signs that show values are set to rise or fall dramatically. The problem with most crypto coins is that their value is based on hype.
The major concern for governments is that crypto does not need any centralised authority. This revolutionary technology has kicked banks out of the equation and crypto exchanges have grabbed the opportunity. Binance is the leading crypto exchange with a daily crypto trade volume of billions of Euros.
Crypto Regulation
No authority has control over blockchain and more and more people continue to try their luck with crypto trading. However, governments can put a check on crypto exchanges. India has recently decided to regulate crypto exchange Apps and crypto-asset holders will have to pay 30% tax. Rumours suggest that Russia may legalise Bitcoin soon, in just some examples of the rapidly changing world of crypto regulation.
Crypto Assets Tax Treatment
In 2018, the HRMC relased their crypto assets guide as the first step to defining individual tax responsibilities relating to crypto, followed by their business crypto assets taxation policy. The latter outliens the scope of taxation for companies and businesses holding crypto currencies. Therefore, crypto-asset taxation is equally important for individuals as it is for companies.
Since digital assets have become a standard mode of payment for many virtual properties and NFTs, they now are trading like normal currencies and assets. However, it may take years for digital currencies to be recognised as government-approved tokens unless more countries decide to launch government-backed digital currencies.
Since ignorance is no excuse for breaking the law, make sure that you understand the relevant crypto assets tax laws in your country or contact a certified crypto tax advisor for advice.
HMRC’s View on Crypto
If we avoid complex crypto jargon, HMRC crypto tax policy essentially addressed cryptocurrencies as means of investment with no underpinned value assigned by an authority. The value, as HMRC views it, depends on whether you use the coins as an investment of exchange, that is, to buy or sell.
Cryptocurrencies are Different to Conventional Currencies
Like an other form of income, income tax applies to trading profits made by crypto asset trading. Since HMRC treats cryptocurrencies differently than conventional currencies, the general rules of currency trading or capital gains on holding currencies do not apply. This is why it is extremely important to check your country’s taxation laws and seek expert advice as needed. These are the early days when it comes to crypto, and different countries are sure to define and treat crypto in different ways going forward.
Many companies and businesses now regularly trade in crypto assets and many are even holding them over the long term. These practices, as per HMRC policy, are subject to corporation tax and income tax on profitable trades as well as trading losses. However, the case of losses is complicated – HMRC will investigate the presence of trade badges before issuing loss relief.
Tax Treatment of Awarded Cryptocurrencies
Airdrops and mining are the two most popular ways of generating cryptocurrencies. As far as airdrops are concerned, crypto assets may be treated as investments. However, things are still unclear, and it will likely depend on how different exchanges award airdrops for successful referrals and digital marketers.
Equally, mining crypto assets is still under consideration by crypto taxation legislators. Chances are that such earnings will be treated as taxable income.
Challenging Times Demand Careful Action
Nobody knows how taxation laws unfold for crypto assets in any given region and into the future. One thing is for sure – countries will need to accept and regulate digital currencies and crypto exchanges. Regulation will lead to further legislation and you should be sure to stay up to date and follow your local laws to avoid illegal trading. The industry still has the potential to generate millions for early investors especially in Metaverse, but big profits come with huge legal responsibilities!
