Bitcoin – How Cryptic is Crypto?

Bitcoin – it’s all a bit Cryptic….

If we asked a survey of 100 people (like in a Family Gameshow on PrimeTime Television in the 1980’s) to name a type of “Cryptocurrency”, it would be safe to say that at the top of the board in Position No.1 would be Bitcoin. Even for the masses of people with limited knowledge on Cryptocurrencies it seems that everyone is aware of Bitcoin and the curiosity is growing.

This is not going to be an article about the history of Bitcoin and the ups and downs since being introduced to the world.  If you want to know more about that then we would suggest watching one of various documentaries such as “The Rise and Rise of Bitcoin” or “Banking on Bitcoin”.   These will introduce mysterious characters such as Satoshi Nakamoto (you will have to watch to find out who he is). In fact it was these type of documentaries that really got us interested in finding out what Bitcoin was all about.

Someone’s knocking at the door….

Not long after these documentaries were released, at the start of 2017 we saw the first trickle of potential clients walking through the door at Alexander Myerson & Co.  The majority where enquiring about the Tax Implications of Potential Gains that could be made with Bitcoin and the Accounting Treatment of such Transactions.

But to understand all of the above, it would be sensible to at least give a brief description of what Bitcoin is and why someone involved in the dealing of Bitcoin would need to seek the advice of Alexander Myerson & Co.

What’s it all about?

Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Ok, that may be a bit of a mouthful so let’s try and explain this in layman’s terms.

A bit simpler…

We are sitting in the pub and happen to meet each other (no particular reason for being in the pub, but let’s say a pub). I introduce myself to you and then hand you a calculator (bit random….but I am an Accountant!).  So…. You now have one calculator and I have zero.  It is clear between you and me what has just happened. I had 1 calculator and you had zero, now out of my generosity you have that 1 calculator and I have zero.  We both know that this transaction happened, but there was no 3rd party involved to assist with the transfer.

No 3rd party….

Now lets imagine that the calculator was in fact a Digital Calculator and you could not touch it. We now get into the concept of “Double Spending”.  If we were to make the same transfer to each other but in Digital Form, what if I made copies of the Digital Calculator ?….. hence the problems start.  Remember we mentioned the concept of no 3rd party being involved in the transaction to make it happen.   So how did Bitcoin solve this problem….

Right, at this point, watch the documentaries, they will explain how they did it via public ledgers, with a set amount of digital calculators, and a way in which the digital transfer felt like a physical transfer (that we made in the pub).

What does this mean for me?

When the first people started to walk through the doors of Alexander Myerson & Co wanting our advice on Bitcoin, they didn’t want to know about the above as they were well down the line in understanding what it was all about and in some cases were educating us on the subject.  What they really wanted to know was how should they account for this currency? What about tax on gains made when trading in the currency? This was all new to them and indeed was new to Accountants.

So in a nutshell, this is what you need to be aware of. Currently Bitcoin is generally being bought and held as an Investment Asset.  In years to come the likelihood is that it will be used more and more as a means of exchange.

And HMRC….

Any profit or gains will be looked upon by HMRC on a case by case basis where the specific facts will be ascertained. There may be for example a one-off highly speculative transaction that can avoid taxation altogether.  HMRC will need to look at all of the facts surrounding your individual case.

Bitcoin held as an Investment Asset and sold will usually be subject to Capital Gains Tax (although for 2018/19 there is a tax free exemption on the first £11,700 of gains). This is similar therefore to if an Individual bought some shares in a company and sold them at a profit at a later date.

For businesses, imagine if the Bitcoin was being held like a bank balance to pay for items, but as the value of Bitcoin rises and falls, these currency gains and losses would be reflected in the Profit and Loss Account and be taxed accordingly. Mention the word Bitcoin and one of the words most associated with it would be “Volatile”, which means the gains and losses and the tax impact could be significant.

Bitcoin can be taxing!

Bitcoin is subject to various different taxes dependent on the specific facts (Corporation Tax, Income Tax, Capital Gains Tax and lets not get into Inheritance Tax). It all depends on the facts of your case, if you are deemed to be Trading in Bitcoin and what entity you are.  Furthermore it is HMRC’s stance that failing to declare such gains could amount to tax evasion.  Therefore it is imperative that Professional advice is sought at an early stage.

Whether we like it or not, Bitcoin is here, it is being used and from an Accounting and Taxation Perspective it needs to be dealt with correctly. When taking on a new client, we fill in various “Know Our Client” forms.  One of the questions that is standard on this form is “Does the client use Bitcoin?”.  5 years ago we would not have known what that question was about, in another 5 years there may very well be a similar question regarding something else that right now we as Accountants are unaware of.

Here to help

If you have any dealings in Bitcoin or indeed any Cryptocurrencies or would like to know further regarding anything mentioned in this article then do not hesitate to contact Alexander Myerson & Co Limited.