Cryptocurrencies are a type of cryptoasset that make use of a type of distributed ledger technology called blockchain. Cryptocurrency can be used as a means of exchange or held as an investment.
Back in 2009 bitcoins were the first cryptocurrency. The software was made available to the public and bitcoin mining, the process whereby new bitcoins are created and transactions are recorded and verified on the blockchain began. In the early stages the only way to get bitcoin was by mining but now people can purchase existing cryptocurrency but it is still possible obtain new currency via ‘cryptomining’.
Part of the rationale for the bitcoin was the insecurity of banks as exposed in the worldwide financial crisis in 2008, some people felt that by missing out the middleman, the bank, they would be more secure. However, there are no controls over cryptocurrency, they are not regulated by the Financial Conduct Authority (FCA) and if you lose your password and/or hard drive you have lost your cryptocurrency.
The taxation of cryptocurrency was examined in the January 2019 TAXline article “Shining a light on cryptocurrency”.
A task force made up of HM Treasury, FCA and the Bank of England issued its final report on cryptoassets in October 2018 and it was shortly after this that HMRC issued its guidance on the taxation of cryptocurrency.
HMRC has now followed up and has reportedly requested that digital currency exchanges provide information about customers’ names and transactions presumably in the hope of identifying tax evasion. Those people using digital currency exchanges should check if they have a tax liability to report and if so to make the necessary declaration before the taxman comes knocking.
It is sobering to note that the first bitcoin trade was in 2010 when someone swapped 10,000 coins for two pizzas; the value of those bitcoins today is over £94m!