An Introduction to Crypto Assets: What Are They?
Over the course of lockdown, we have seen a boom and increase in the rate of popularity over cryptocurrencies and crypto assets. As more and more stories are released about major financial benefits to be gained from investing in the likes of Bitcoin, Ethereum, Stellar, etc, people are turning their heads to learn about why and what they are.
What are Cryptocurrencies?
At its most basic level, a cryptocurrency is a digital currency used in transactions and monetary exchanges. Unlike regular forms of currency, there is no centralised authority controlling the money, so more control is returned to the investors using it.
The system is still secure as cryptography is used as a means of security. It can be greatly comforting to many, as there is no central bank or government controlling your money, but this also means that there is no one around to manage the system if something goes wrong. If your funds are stolen, then there is little assistance that you can gain other than pursuing yourself.
However, does this really explain anything?
When you break down the word 'cryptocurrency', you begin to understand more about this mysterious, online trade.
Crypto means hidden, secret or concealed. In the sense of online currency, this means that the system is secure and protected, not being monitored by a third party.
Currency is much easier to understand and is the backbone of why cryptocurrency is taking off as much as it is right now. Differentiating from the normal cash we are used to dealing with, cryptocurrency is an electronic form of currency.
What can I use Cryptocurrency for?
As of right now, you cannot use cryptocurrency as a regular payment in any UK major store. This is being developed to change, so in the future you may be able to. A large portion of banks and accountants will instead refer to crypto as 'cryptoassets' instead of a currency, such as Sterling.
Investors will buy cryptocurrencies like any other investment, expecting a rise in value over time. This can be unpredictable and is where the majority of the bad reputation arises from, as it can be a risk to invest in a certain cryptoasset.
However, there is a practical reason for using cryptocurrency in higher end situations. Low-cost money transfers are the biggest appeal, as you are able to transfer money between people at low costs and higher speeds, more so than traditional banking. The increased privacy is also
ideal for larger transactions without the bank getting involved and asking why you're sending a larger sum of money.
How do people begin with cryptocurrencies?
Now you understand what cryptocurrency is, you may be interested in how people get started with them. Unlike what you may believe, they are not only reserved for high-end investors and many people are starting to dip into the crypto world.
Although you may have heard of names such as XRP, Litecoin, Dash, Ethereum or more commonly Bitcoin, there is a lot more to it than the name. Every transaction, regardless of the platform or brand, is recorded on a blockchain.
A blockchain is a peer-to-peer network system that records all transactions made in Bitcoin or other forms of cryptocurrency, giving the entire system legitimacy and security. This ledger is shared and immutable, giving everyone within that community proof that a transaction has happened, and it cannot be altered.
The most common way to get started with cryptocurrencies is to use a website that allows the buying and trading of them. Many of these sites walk you through the process and cater for absolute beginners. Brokers are used in such systems and are there to ensure that your money is being distributed to safer options among the vast cryptocurrency alternatives.
What taxes are liable for Crypto Assets?
The answer to this question is not a simple one, as you can only understand this if you are a trader or an investor, and this will affect the amount and type of tax you pay on your crypto assets and transactions.
If you hold the crypto assets in your personal name as an investor, you will be paying Personal Capital Gains Tax. If you are holding assets as a day trader, and it is essentially your core job, then it will fall under the Income Tax regime.
As of right now, you can earn up to £12,300 a year and not pay any personal taxes on gains made as an investor. If trading becomes so heavy that you are regarded as a trader, then you will fall into the income tax regime, which is ultimately the same as being self-employed and taxed at rates from 20%-45% of the trading asset gains. HMRC is still configuring what this means for traders, and they have outlined themselves that someone who trades heavily with crypto in the UK is still a rarity.
A few of our clients also use their LTD company funds to invest in crypto assets, which adds a unique dynamic to the crypto tax world. If you are pulling money out of your company to invest personally, then you have to pay personal tax on the withdrawals as any business that provides you with money to live on and you are using that money to invest in crypto, you will pay tax. To get around this, some people are choosing to invest from their LTD companies so that any profits made from the investment gains are subject to Corporation Tax at 19% (the current rate as of right now), and then decisions can be made whether to draw any money to a personal account or not, resulting in extra personal taxes which can be mitigated with some tax planning.
It will be interesting to see what's in store for Crypto in 2022.
We are always here to help, if you have any questions please get in touch.
If you are interested in learning more about crypto assets and how they can be used and the taxes associated with them, listen to our latest episode of our podcast 'More Than Just Numbers'! This can be streamed across all your preferred podcast sites; Spotify, Apple Podcasts and even on Youtube.
Here are the links:
Spotify: https://spoti.fi/3J0KRcn
Apple Podcasts: https://apple.co/3mcDaGy
YouTube: https://bit.ly/323ZKtW