Even though the earliest form of cryptocurrency appeared decades ago, it has taken the world by storm in recent years. What exactly is cryptocurrency and should you add it to your investment portfolio?
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Essentially, cryptocurrency is a digital currency that can be used to buy goods and services like any other currency, but it uses a peer-to-peer network of transactions in an online ledger with strong cryptography (code-writing) to secure these transactions.
Blockchain, as it’s called, uses multiple computers to manage and record activity. It has no physical presence and cannot be administered by a single authority.
Many companies issue their own currencies that can be exchanged for goods and services specific to their company. They work the same way as arcade tokens or casino chips – you will need to exchange real currency for the cryptocurrency.
The most well-known example is bitcoin and it became popular because of its anonymity. Because it’s viewed as a great way to protect oneself against inflation, it’s being touted as the future of money.
With success comes the opportunity for the government to gain revenue through taxation. But if something isn’t “real currency” how does the government tax it?
Basically, the UK views anything capable of being owned or anything with value as taxable. It works a bit like stocks – you’re only taxed when you realise the gains you’ve made. With cryptocurrency, this could be when you convert it back to cash, make a purchase, or even exchange it for another form of cryptocurrency.
Cryptocurrency falls under Capital Gains Tax rules, but the extended rules surrounding the assets are quite complicated.
With careful planning, tax implications can be mitigated but there is a lot more to consider. It’s advisable not to dive into this new form of currency blindly.
If you’re interested in learning more about cryptocurrency and how you can incorporate it into your personal financial strategy, it’s important to talk to your trusted financial adviser.
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