The use of cryptoassets is changing, says Chris Etherington, private client tax partner at RSM UK, and this has given the taxman a lot to think about.
In the latest FTAdviser In Focus Fireside Chat, Etherington explains that historically investors were drawn to the assets due to their potential to make a substantial gain, but increasingly they are taking a more professional approach, looking to make an income similar to more conventional ways.
"[People] assume this is just a capital gains tax play and trying to get that growth, but actually there is a lot of people who are looking at certain projects and how [to] generate an income, similar to trying to get an interest return or a dividend return on your stocks and shares," he says.
"Typically they are going into areas such as decentralised finance or even starting their own trades in the cryptocurrency and blockchain world to generate almost an employment income to some extent.
"It's interesting to see how it's evolving in quite a short space of time on that front."
But a lot of people do not realise what their tax obligations are, he warns. "As with any other financial assets that you might be buying and selling, typically the gains are going to be subject to CGT. It's by exception that they will be subject to income tax.
"What we have from a tax perspective is a complete vacuum of legislation in this area, so what we are doing is taking the rules a lot of people will be familiar with in terms of buying and selling shares, overlaying that into this digital arena of cryptocurrencies and trying to make the square pegs fit into the round holes.
"Last year was really the first year that a lot of people have had to wrestle with this and I suspect a lot of people have got it wrong."
He added: "It's not helped by the fact that we don't have regulation; we don't have legislation in place for this and a lot of people are in the dark somewhat. HMRC are trying their best to interpret legislation as it stands now.
"If we want to make a success of the cryptocurrency and the blockchain space and for people to really grow businesses and to maintain their investments here we need to get our house in order and we need to start putting some regulation and legislation in place to make sure we are making the most of the economic benefits we might see."
To hear more about how crypto is taxed, how it is trying to replace major currencies, and learn to differentiate between a currency, token and NFT, click on the image above.
carmen.reichman@ft.com
