Accounting for Cryptocurrency | A complete guide
- 09 May 2022
- 4 minutes read
For new investors, Accounting for Cryptocurrency in the UK can be confusing. Many people are still unfamiliar with this area.
Cryptocurrency has been around since 2008, but it has only recently become popular. Questions about cryptocurrency taxation are increasing due to the recent growth in cryptocurrency investments.
If you are a crypto investor who has seen a significant return on your investment, then now is the time to know more about accounting and cryptocurrency taxation in the United Kingdom.
Continue reading to learn about the most recent cryptocurrency tax and accounting regulations in the United Kingdom.
Accounting for cryptocurrencies
Neither the IFRS (International Financial Reporting Standards) nor the UK GAAP (Generally Accepted Accounting Practice) officially mentions cryptocurrency accounting.
However, ICAEW published a technical report in 2018 that indicated possible accounting treatments of cryptos under FRS 102. It is the most crucial accounting standard in the UK financial reporting regime.
They also recommend thinking about the business model and what the entity plans to do with its cryptocurrency. It will serve as the foundation for deciding the appropriate accounting treatment.
As per this report, cryptos cannot be considered cash. It is because digital currency is not a legal tender like cash. It also faces a considerable risk of value change, which is opposed to FRS 102's definition of cash.
It also ruled out the prospect of cryptocurrency classifying as a financial instrument. Cryptos do not constitute a financial asset of an organisation because they are neither cash nor an equity instrument.
However, cryptocurrencies may be classified as inventories if purchased and traded in the ordinary course of business. They will be impaired and valued at a reduced cost or Net Realisable Value.
Investments in cryptocurrencies must meet specific standards to classify as trading. According to the report, businesses would only acquire and sell cryptocurrencies under 'extraordinary circumstances.
It leads us to the most practical and widely recognised solution: treating crypto currencies like bitcoins as intangible assets.
Cryptocurrencies as a form of intangible property
FRS 102 defines an intangible asset as:
'An identifiable non-monetary asset without physical substance. Such asset is identifiable when:
- It is separable in that it can be divided or separated from the entity and sold, transferred, licenced, rented, or exchanged separately or combined with a linked contract, asset, or liability;
- Or it emerges from contractual or other legal rights, whether or not those rights are transferrable or separable from the entity or other rights and obligations.'
Cryptocurrencies perfectly fit this definition. It has no physical form and can be separately identifiable from the entity. It can also be purchased and sold on cryptocurrency exchanges.
When it comes to accounting for cryptocurrencies as intangible assets, FRS 102 offers two options:
● Cost model
If accounting under the cost model, cryptocurrencies should be presented at historical cost.
● Revaluation model
If recorded under the revaluation model, it must be done at a fair value. The revaluation reserve should account for any changes in fair value.
Both models will be subject to impairment review and amortisation.
However, an active market is required to employ the revaluation model, which isn't the case for all cryptocurrencies. The cost model would be more justifiable in these situations.
Cryptocurrency tax in the UK
There is no special HMRC cryptocurrency tax legislation, just as there is no specific accounting regulation. HMRC published internal guidance on taxing cryptos transactions in December 2019. This HMRC crypto tax advice, on the other hand, is not backed up by any legislation.
HMRC, like the ICAEW, considers cryptos to be intangible assets. According to a joint report from the Treasury, the Financial Conduct Authority, and the Bank of England, Cryptocurrencies are not currency.
However, HMRC says it is essential to distinguish between trading and non-commercial activity. This discrepancy will impact the treatment of cryptos in UK tax law.
They recommend using the same approach as trading shares, stocks, and other financial goods to determine which applies. HMRC believes firms will rarely satisfy the criteria for the crypto tax to treat the activity as trading.
Cryptos generated by 'mining' activities might be considered trading for tax purposes. However, for specific circumstances, you should always seek guidance from HMRC.
Capital gains tax on cryptocurrency
Non-trading cryptocurrency transactions are liable to capital gains tax when sold, just like when you purchase and sell shares. It is true for both corporations and individuals. Individuals must also include this information in their self-assessment tax returns.
No tax will be due for holding cryptos without disposal. Exchange of one cryptocurrency for another, on the other hand, will be considered disposal. In the United Kingdom, capital gains tax will apply to this cryptocurrency trade.
If activities are considered trading, they will be subject to a different cryptos tax in the United Kingdom. Individual income tax takes precedence over capital gains tax and levies on profits. Profits (or losses) from crypto trading are part of the trading profit rather than a chargeable gain for businesses.
HMRC also provides guidance on what costs you can deduct from the proceeds of a transaction to calculate capital gain.
Cryptocurrency accountant UK is still a new concept. Regulators' guidance is still in its early stages, and it will undoubtedly change over time. Anyone who invests in cryptocurrency should consult with a professional.
Check the HMRC website to remain up to date on the latest developments in the UK's tax treatment of cryptocurrency.