Explaining crypto currencies - including Bitcoins
30th October 2018 by Fiona Hotston Moore
Bitcoins have now been in existence for nearly a decade and yet they are still a mystery to many including those in the financial world. In fact, “What is Bitcoin” is one of the top google terms.
What is cryptocurrency?
In essence cryptocurrency is a digital currency that allows the transfer of funds from one party to another without the involvement of a third party such as a bank. There are many types of cryptocurrency including, the better known, Bitcoin.
Cryptocurrency is transferred from one virtual “wallet” where they are stored to another user’s wallet allowing for the purchase of goods, services or assets. The “wallet” is itself a software program.
How do you obtain cryptocurrency?
Bitcoins and other cryptocurrency can be purchased with existing currency albeit some banks will not allow their purchase. They can also be “mined”. Mining involves a digital process where users confirm and document other user’s transactions receiving currency for their efforts.
Why use cryptocurrency?
Cryptocurrency allows the users to move funds outside of the banking system. It is inevitably harder to trace the movement of funds and thus they are attractive to those engaged in money laundering, crime, tax evasion, terrorism and hiding assets from spouses. However, the existence of cryptocurrency can be identified by the initial transfer out of a bank account (if the acquisition is funded by a purchase from another currency), when the funds are transferred back into a traditional currency account or through the spending of the currency.
Furthermore, whilst tracking the currency itself is hard a forensic analyst may find the digital trace and authorities, including HMRC, will generally now ask specific questions on disclosure of worldwide assets regarding the existence of cryptocurrencies.
Cryptocurrency may be used for legitimate reasons because it avoids paying banking charges and because of its speculative nature which offers potentially high returns. On occasion the currency value has swung by nearly double in a matter of days.
How do you value cryptocurrency?
Cryptocurrency is valued on the virtual exchange. The values can however be highly volatile. It’s estimated there is however $700 billion of currency worldwide in circulation.
How is cryptocurrency taxed?
The starting point is to determine what cryptocurrency is. In some countries, including the UK, it is treated as a currency whereas in others it’s treated as a commodity.
The next point to ascertain, is who owns the bitcoin or other currency? Generally, this is taken as whoever controls the “wallet” but it’s notoriously hard to identify this individual.
If the taxpayer is speculating in the currency, HMRC will need to determine if the activity is gambling, trading or investing and where the profit arises.
At present the tax legislation dealing with cryptocurrency is in its infancy and tax advisers are required to take a view on how to account for the transactions.
In conclusion, cryptocurrencies have now existed for nearly a decade. They provide a massive opportunity for those intent on illegal transactions but they are also increasingly used by individuals and businesses for legitimate reasons.
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