Understanding Crypto
Crypto is a digital currency – operated solely online, created and stored on the blockchain. This is a decentralised, digital exchange that uses cryptography to verify and transfer funds.
OK, so what does this mean? Decentralized means it is not linked to any central authority, like a banking institution or government. A central authority holds up and maintains a market, meaning a government or central bank can step in and manage things like interest rates to control inflation and, thus, the value of our fiat currency – this is not possible for the crypto market. (Fiat currency is regular centralised money, such as GBP, USD, EUR, and so on).
This decentralisation is also what makes crypto so volatile – with no authority to step in and steady the market, the value of crypto is dictated by what people are willing to pay for it. So, yes, this makes investing or holding crypto a risk – the crypto market could fall, and the value of your tokens plummet or even go to Nil, and there is no assurance of this reversing or protection if this happens. Should you invest in crypto, you should do so while understanding this risk.
The blockchain and its cryptographic technology means that it is almost impossible to counterfeit the currency, the code cannot be changed or duplicated. All transactions are stored on the blockchain, which is public – anyone can see crypto transactions done on the blockchain and they cannot be changed once executed.
Crypto currency held by an individual is stored in wallets. Your wallet is identified by a long string of letters and numbers, and your name does not appear on your wallet name as it does on your bank account (although you can rename a wallet if you wish) – so the public nature of the blockchain does not mean anyone can identify who a wallet belongs to. Keeping access to your wallet secure is crucial. Due to the decentralized nature of crypto, should anyone gain access to your wallet and remove the funds, with no central authority managing the system, there is no one to help you recover those funds. When you open a wallet, you are given a seed phrase – a 12 or 24 set of words. You cannot change this seed phrase (so not using a ‘hackable’ simple password that you use all the time!), and this phrase alone is what is needed to access or restore access to your wallet – so KEEP THIS SAFE! Do not share it with ANYONE. Again, decentralized means no help desk or support staff, which means no one will ever need to have this phrase other than you. Whilst wallet platform providers will have support to guide you through regaining access to your wallet should you need to – they will never ask for your seed phrase.
Can I use Crypto Currency in my Business?
Yes, you absolutely can. From an accounts perspective, you treat your wallet(s) as you would any other bank account in your business, recording the transactions and transfers as normal accounting transactions.
When it comes to the value – there are a number of ways to do this, and it depends on the crypto currency token you decide to hold. There are ‘stable’ coins, such as USDC or USDT – that track the value of the US Dollar, meaning 1 USDC or 1 USDT equates to 1 USD (with very slight fluctuations). If you held USDC or USDT, you would show this wallet simply as a US dollar foreign currency account in your business accounts. For other tokens – you would need to select a fiat currency to show this in your accounts, either GBP or USD and enter all transactions at that fiat currency value at the time of the transaction and carry out an annual revaluation to revalue the tokens held to the base fiat currency as at your year-end date.
The value of your Crypto would show on your balance sheet as a bank value, like the balance of your bank accounts.
Crypto and Personal Tax
This is an evolving landscape. At the time of writing, there is analysis ongoing on feedback provided on a suggested Crypto Asset Reporting Framework – so how individuals report on their crypto assets may change.
Like any asset, should you sell and make a profit on your crypto assets – this is a taxable and reportable income event. Think of buying and selling shares in the stock market. You buy some crypto at £100, and then cash out your wallet several months later for £500, you have profited £400 and that is taxable. This is simplifying things, but you understand the idea! Monitor your buying/selling of crypto assets, and be prepared to report any profits as a capital gain and pay tax on it. Under current rules, whilst the crypto sits in a wallet – it is not taxable or reportable.
This link provides more information on reporting on crypto asset gains.
Crypto Terminology
Crypto: A digital currency operated solely online, created and stored on the blockchain.
Blockchain: A decentralised, digital exchange that uses cryptography to verify and transfer funds. It is a public ledger where all transactions are stored and cannot be altered once executed.
Decentralized: Not linked to any central authority, like a banking institution or government, meaning there is no central control over the market or currency.
Central Authority: An entity, such as a government or central bank, that maintains and regulates a market, including managing interest rates and inflation.
Fiat Currency: Regular centralized money issued by governments, such as GBP, USD, and EUR.
Volatile: Subject to rapid and unpredictable changes in value, as seen in the crypto market due to its decentralized nature.
Cryptographic Technology: Technology that secures transactions on the blockchain, making it nearly impossible to counterfeit or alter the currency.
Wallet: A digital tool where cryptocurrency is stored, identified by a unique string of letters and numbers. Wallets do not display the owner’s name.
Seed Phrase: A set of 12 or 24 words given when opening a wallet, required to access or restore the wallet. It is crucial to keep this phrase safe, as it cannot be changed.
Stable Coins: Cryptocurrencies like USDC or USDT that are pegged to the value of a fiat currency, such as the US Dollar, to minimize fluctuations.
Capital Gain: The profit made from selling an asset, such as cryptocurrency, which is taxable and reportable.
Crypto Asset Reporting Framework: A developing set of guidelines on how individuals should report their crypto assets for tax purposes.
