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Cryptocurrencies: to be or not to be a currency? - that is the question

08 March 2019

While the initial excitement around and, indeed, exponential increase in the value of bitcoin and other cryptocurrencies has died down, in the accounting and tax world, increased attention has been paid to how these assets are treated, especially as we come closer to the annual tax return filing deadlines. In this article, we explore the tax treatment for companies investing or trading in cryptoassets in anticipation of HMRC releasing its guidance. 


By way of background, cryptocurrencies operate as decentralised alternatives to a traditional fiat currency by utilising a peer-to-peer network commonly called a blockchain or distributed ledger technology. The most commonly known and held cryptocurrency is bitcoin which was developed by Satoshi Nakamoto (whose identity is still a mystery) and released in January 2009. Since then, many thousands of cryptocurrencies have been developed ranging from those seeking to be a digital currency, to those more akin to a loyalty reward system.

Owing to the variety of cryptocurrencies that have been developed and the relative early stage of the technology, many myths have developed around whether cryptocurrencies are taxable or not. We outline below the most common urban myths that we have heard over the past years and our view of the tax position.

Dispelling the myths

Owing to the broad guidance issued by HMRC back in 2014, many urban myths have sprung up around the taxation of cryptocurrencies. Through BDO’s conversations with HMRC, we understand that there is unlikely to be a specific tax regime for cryptoassets: guidance published in December 2018 for individual taxpayers sets out some principles that we suspect will be echoed when HMRC issues its corporate tax guidance in due course.

We’ve outlined below the most common myths around cryptocurrencies along with the position we believe will be adopted in HMRC’s guidance:

Myth BDO's view
Cryptocurrencies are currencies

The use of cryptocurrencies as an acceptable payment method by a small minority of predominately online businesses has led to the commonly held belief that cryptocurrencies are currencies.

Whether an asset is a currency or not comes down to a very subtle legal and accounting analysis predominantly focusing on whether the asset functions as a store of value, means of payment, and a unit of account.

In the round, currently, all cryptocurrencies do not meet the above criteria because of their extreme volatility. For example, bitcoin’s value has increased by 65% in one day, whereas oil (which has a volatile price) has only increased by 10% in one day. Equally, cryptocurrencies lack a universal means of payment and very few businesses holding cryptocurrencies hold them without benchmarking to a fiat currency. On this basis, many central banks and governments prefer to use the term crypto-asset to reflect this.

Gains on cryptocurrencies are a form of gambling/ speculative trading and are tax free

This myth appears to have developed in the early stages of cryptocurrencies where the markets were in their infancy and were highly volatile.

HMRC initial guidance on Bitcoin (Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies) also proved unhelpful in this respect by noting that the highly speculative nature of Bitcoin could make any gains or losses fall outside the scope of tax. The recent HMRC guidance for individuals puts beyond doubt that HMRC does not view cryptoassets as the same as gambling.   

Today the markets are more established with multiple sophisticated platforms and price comparison websites that make it unlikely that any gains would be viewed as any more speculative than investing in traditional stocks and shares.

Paying an employee in cryptocurrencies is tax-free

Paying an employee’s earnings in cryptocurrencies is likely to be considered equivalent to ‘money’s worth’ as the tokens are readily convertible assets and are therefore subject to the usual employment taxes. Read more.

Exchanging one cryptocurrency for another is not a disposal and therefore not taxable A holding of cryptocurrency is likely to be treated as a chargeable asset for tax and, therefore, any disposal of one cryptocurrency for another will give rise to tax on the gain on disposal. There may be possible reliefs available for the disposal (e.g. for individuals the annual exemption for capital gains).
If I pay for goods or services in cryptocurrency there is no VAT

Buying or selling goods or services using cryptocurrencies are subject to VAT in the same way as paying with a banknote or credit card would be.

The value of the goods or services should be translated into the pounds sterling equivalent at the date and time of the transaction that can result in a high level of volatility especially if the tokens are not converted to pounds sterling at the same time.

All cryptocurrencies are the same and are taxed the same

While there isn’t an agreed taxonomy for cryptoassets, there are broadly four different types:

  • Exchange tokens – commonly referred to as cryptocurrencies (such as bitcoin) that utilise a blockchain but are not centrally backed. These tokens do not have any rights or access attached to them.
  • Security tokens – these tokens typically provide ownership rights, or a repayment of a sum of money, or an entitlement to future profits.
  • Utility tokens – tokens that can be used as payment or redeemed for a specific product or service typically via a blockchain.
  • Stable coins – relatively new token that seeks to mirror the stability of fiat currency or a commodity by pegging the value of the token against the underlying asset.

Owing to the complexity of UK tax law and the current lack of specific accounting guidelines, each of the four categories above is likely to have a different tax outcome. To date, the current practice is to treat exchange tokens as being an intangible asset; however, certain security and stable coins may be treated as financial assets and, therefore, fall within the loan relationship/derivative contracts legislation.

ICOs (or token sales) are tax exempt

Unlike raising equity or debt finance, the tax treatment of initial coin offerings (‘ICOs’) has no specific exemption from normal taxation or accounting treatment. Currently, this results in the finance that is raised through an ICO being subject to tax in the UK.


While many of the above myths emerged from a relative low level of understanding of cryptocurrencies, as the accounting profession has gained an increasing exposure to cryptocurrencies, an established view on the accounting and tax treatment has emerged. This view is largely based on fundamental tax principles and case law that, inevitably, means that each token or cryptoasset needs to be reviewed to ensure the correct accounting and tax treatment is followed.

For help and advice on the treatment of cryptocurrencies and cryptoassets, please contact David Britton.

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