Increasingly companies are looking at Bitcoin and other cryptocurrencies for their investment potential or transacting with customers or suppliers outside of traditional banking systems to access new and emerging markets.
As interest rates remain low, fiat currencies like the Pound and the US Dollar continue to be printed, and actual inflation starts to set into the economy, investors sitting on cash are beginning to feel the pinch of their hard-earned will buy them in the coming years. Cryptocurrencies such as Bitcoin are both emerging technology and asset classes that have captivated a junior audience recently. With bitcoin's properties like gold (store of value, scarcity, fungible, valuable as a currency), investors are looking at the digital asset as a hedge against traditional markets.
While Bitcoin has been used as a speculative asset due to its short-term volatility, the capabilities of the technology cannot be ignored, even by the most junior investor. The ability to move value anywhere in the world, transparently, in a truly peer-to-peer fashion without using a bank or intermediary in under 10 minutes cannot be ignored or dismissed as a true breakthrough in financial technology.
Bitcoins' price volatility since its birth in 2009 makes for great headlines. Its long and steady price growth from under a fraction of $0.01c to over $55,000 (October 2021) has shown that its digital properties, transparent transactions, and limited supply have kept long-term investors happy and will continue to attract new investors to the market. While the crypto-asset market is still tiny at under 2 trillion US dollars, Bitcoin still makes up 50% of this market cap with only a rumor of 120 million users. As user count, adoption, payments, and technology become more mainstream; investors will continue to consider bitcoin over other tokens as their entry-level asset before looking into more exotic options such as Ethereum, Ripple, or Polkadot name a few.
Bitcoin has been touted to become one's bank. You can send and receive Bitcoin to anyone globally, from anywhere in the world, with any internet-connected device or even your smartphone. You can view all transactions in real-time, and every day new merchants are coming online that accept Bitcoin and many other cryptocurrencies.
With becoming your bank, comes bank-like responsibilities: custody, security, anti-money laundering, cybersecurity, and documentation… before you can even think about buying and storing your first bitcoin.
Current crypto exchanges with regulatory solid and banking relationship standards are a wonderful place to start rather than an offshore exchange. They will offer custody for free, security designed and battle-tested by experts, and constantly run and monitor AML checks on crypto entering and exiting the platform to ensure a safe and secure trading environment. A platform holding your crypto will also offer other benefits, such as the ability to trade, earn interest, and place take-profit orders at a price in the future.
Future crypto exchanges may very well resemble private banks in the future, offering complete banking and investing services across several different asset classes. Early on, partnering with the right firm may give you a "long-term member" benefit down the track, so it’s worth shopping around to see which one has the best deals, product roadmap, and team to deliver on their crypto vision and mission.
Considerations for Directors
As a director of a limited company, you are duty-bound by the Companies Act, and you must show and prove an understanding of what you may be investing in. A director must act in a way they consider, in good faith, would be most likely to promote the company's success for the benefit of its members. All directors are held to the standard of a ‘reasonable director’ and will be assumed to have the knowledge, skill, and experience to be expected of a director in that role. Any investment decision made by the directors must be appropriately documented.
Suppose you have managed to get past that exciting sub-heading. In that case, it is interesting to note that neither International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Practice in the UK (UK GAAP) have specific provisions detailing how to account for cryptocurrencies (if you have finished that sentence and thought, “that wasn’t interesting at all," then you enjoy life more than the average accountant).
The treatment of any cryptocurrency investment will vary depending on the business in question and the strategic nature of the original investment. It might be held as an intangible; it may be stored as stock. However, the nature and substance of any transaction need to be understood in detail to ensure correct treatment and disclosure in company accounts. They should always involve the guidance of a cryptocurrency expert.
If the last section left you feeling unsettled, then buckle in as we are about to dive down the deep rabbit hole of taxation.
Depending on the activity of a company, the general rule of thumb when a company disposes of cryptocurrency is that any such disposal is treated as capital disposal and subject to corporation tax in line with the company's financial year and prevailing tax rate (currently 19%).
Where the proceeds from disposal exceed the original cost, a capital gain arises, subject to tax. Similarly, where disposal proceeds are less than the actual cost, a capital loss occurs, which can either be offset against any capital gains arising in the same period or where there are insufficient gains in that year, the loss can be carried forward to future periods to be offset against any future gains.
Matters become more complicated where cryptocurrency is received in return for goods and services. HMRC does not consider exchange tokens to be a form of money or currency, and as such, corporation tax legislation such as the foreign currency rules do not apply to tokens. In this instance, the value of the cryptocurrency at the time of receipt will need to be accounted for within taxable trading profits. Suppose the company in receipt of the tokens does not dispose of them at the point of receipt. In that case, any capital gain or loss on these tokens at the future point of disposal will also need to be taken into consideration.
Trading companies can qualify for several beneficial tax reliefs such as Business Asset Disposal Relief (BADR) or Business Property Relief (BPR), which are all dependant on the level of trade a business is undertaking specific to the underlying legislation. If you have a trading company and are looking to invest in cryptocurrency, we recommend speaking to a tax advisor before any investment is made.
Businesses conducting their trades entirely in cryptocurrency will also need to consider making provisions at the point of sale to account for VAT, PAYE & Corporation Tax. Holding cryptocurrency without an off-ramping strategy into fiat could leave the company exposed to risks associated with the market's volatility.
There is a lot to consider, from the practical points of acquisition and storage to the dark wizardry of accounting and taxation.
If in doubt, find out! We would always recommend speaking to somebody who understands this rapidly growing market so that any decision you undertake is an informed decision.
This episode of "Adding Bitcoin to your Balance Sheet" is brought to you by Truelayer.
#CryptoExchangeSeries in collaboration with coinpass and Crypto Curry Club.