Cryptoassets (also known as "tokens" or "cryptocurrency") are digital representations of value or rights, that can be stored, transferred, and traded electronically.
Many cryptoassets use some form of Distributed Ledger Technology (DLT), which is a digital system that records details of transactions in multiple places simultaneously.
Unlike a normal database, a distributed ledger has no central data store. Distributed ledgers provide an unchangeable record of all the transactions that have happened previously. The Bitcoin blockchain is an example of how DLT can be applied.
There are different types of cryptoassets that work in different ways. The main ones include:
Exchange tokens
These are designed to be used to pay for things, but are increasing used for investment purposes as well. Bitcoin and Ethereum are two examples.
Utility tokens
Utility tokens provide the holder with access to particular goods or services on a platform. A business or group of businesses issues the tokens and agrees to accept them as a payment for their goods or services. Utility tokens can sometimes also be traded.
Security tokens
Security tokens provide the holder with specific rights or interests in a business - a bit like the digital equivalent of equity or loan notes.
Stablecoins
Stablecoins are designed to minimise volatility, they are often pegged to assets that are considered to have a stable value, for example the US Dollar or gold.
How the UK tax system treats cryptoasset transactions
Although HMRC does not consider cryptoassets to amount to currency or money (in the traditional sense), that does not mean that crypto transactions escape taxation - on the contrary, there will commonly be a tax impact (often more than one) to consider where there is a transaction involving cryptoassets. Fundamentally the tax treatment depends on the nature and use of the token in question.
In future articles we'll be exploring this subject in greater depth. If you have a question on the subject, or think you may have a UK tax liability on cryptoasset dealings, contact us today.
