Many think of crypto as digital currency and it has often been suggested that certain cryptocurrencies such as Bitcoin will become a global currency, reducing the need for traditional fiat currencies such as GBP.
In the UK, cryptocurrencies are not currently considered currency in the traditional sense, but this does not mean that cryptocurrencies cannot be used in business transactions. Increasingly, businesses are accepting payment in crypto and this can lead to unusual outcomes for the payer and recipient.
Accepting payment in crypto
When the payment is received the crypto will need to be converted to GBP to determine the amount of revenue that needs to be accounted for. This no different from receiving payment in a foreign currency such as USD and there are crypto tracking products that will handle the conversion for you.
If the business is VAT registered, a valid VAT invoice will need to be issued and the transaction would need to be converted to GBP to produce the invoice. Again using software can take the stress out of the process.
The tax on the profits must be funded in fiat (HMRC is not willing to accept crypto as a payment method). If the business has other non-crypto income the tax could be paid from these funds. Where crypto needs to be converted to GBP to settle the tax liability, this is considered a disposal for Capital Gains Tax (CGT) purposes. A resulting taxable gain or allowable loss will arise on the difference between the value of the crypto when received and sold.
Due to crypto's volatility it is always prudent to convert a portion to GBP immediately to cover any tax liability. We have seen businesses accept payment in crypto and not convert enough to GBP to cover taxes, the crypto value has subsequently crashed, and they are left with a tax liability and a substantially reduced crypto asset value from which to pay it.
Finally, the business will need to revalue its crypto holdings at the year-end, and this will create an unrealised gain or loss in the profit and loss account.
Paying in Crypto
When an individual or business makes a payment in crypto this is a disposal for CGT purposes, as such any purchase using a cryptocurrency could give rise to a CGT liability. This is because upon transferring the crypto by means of payment the purchase no longer owns the asset and therefore a disposal has occurred.
Paying employees in crypto
Employees can be paid in crypto and the payment of their salary will be a disposal in the same way as above. The business also needs to account for PAYE and National Insurance on the amounts paid to the employee. Again, the PAYE and National Insurance needs to be paid in GBP and therefore if the business needs to fund this from crypto assets it is strongly recommended that they do this at the same time as payment is made to the employee to minimise the exposure to volatile crypto prices.
Investing in crypto
More and more businesses are investing in cryptocurrencies to diversify and the rules here can become a lot more complex from a tax perspective. The reason for this is that there are no specific crypto based tax laws in the UK and therefore we are currently forced to apply existing tax laws to crypto transactions.
The general rule is that any buying or selling of crypto or exchanging one token for another gives rise to a capital disposal and therefore a gain or loss. Cryptocurrencies are fungible and therefore we must pool them when calculating gains and losses in the same way as for stock and shares.
The position is more complicated for rewards received from staking or lending which can be subject to tax as income or capital depending on how the reward mechanism is structured and care must be taken here.
As you can imagine this causes a great deal of uncertainty and often unfairness. HMRC have released their crypto guidance, but this is not binding nor is it universally agreed upon.
HMRC has started the process of creating crypto specific tax laws with their consultation on how to best tax transactions in Decentralised Finance (DeFi). The move towards creating certainty for UK taxpayers in their crypto transactions is welcome and we can only hope that they arrive sooner rather than later.
What is the future of crypto ?
Regulation is one of the major talking points in crypto at the moment with the EU introducing its Markets in Crypto Assets (MiCA) regulations, making the EU an attractive place for crypto businesses. In contrast, many crypto businesses are considering their future in the United States due to what is seen as anti-crypto narrative and regulatory uncertainty.
In the UK, HM Treasury has been consulting with industry experts on how to best regulate crypto. The hope is that the UK government can quickly implement a pragmatic and robust set of regulations. However, recently the Treasury Committee released a report in which they suggested that crypto should be regulated as gambling, this is at odds with the government's announcement last year that they plan to make the UK a "global crypto asset technology hub" and only fuels the current uncertainty.
Crypto is moving towards a more regulated future, which can only be beneficial for an industry that has been described as the ‘wild west' by some commentators. Regulation could provide greater security and protection for its investors and allow the industry to continue to innovate and grow.
Summary
Businesses can receive payments in crypto but it creates a level of additional complexity that means that widespread adoption is unlikely in the short term. At present, the majority of businesses receiving crypto as payment are those in the crypto space (developers, digitally artists etc.). However, with the introduction of crypto regulations and specific crypto tax legislation these barriers may reduce in the long term and crypto may become a global payment method.
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