Cryptoassets have increasingly become popular with investors from across the globe with a reported 2.6 million people having invested in them since their inception. However there remains uncertainty surrounding what cryptoassets are and the UK tax implications of buying and selling them.
WHAT ARE CRYPTOASSETS?
A crypto asset is basically a digital representation of value or contractual right that can be:
- Traded electronically
TYPES OF CRYPTOASSET
There are different types of cryptoassets which work in different ways. The main types are:
Exchange Tokens: These are meant to be used as a means of payment, and are now very popular as an investment due to potential increases in value. The most well-known of these is Bitcoin.
Utility Tokens: These provide the holder with access to particular goods or services on a platform. A business will usually issue the tokens and commit to accepting the tokens as payment for their goods or services. These can also be traded on exchanges in the same way as exchange tokens.
Security Tokens: These provide the holders to particular rights or interests in a business, such as ownership, repayment of a specific sum, or entitlement to share in future profits.
Stable coins: These tokens minimise volatility as they may be pegged to something that is considered to have a stable value such as the £ or $ or a precious metal such as gold.
WHAT IS A CRYPTO EXCHANGE?
An exchange is a platform where people can buy, swap / exchange and sell their cryptoassets.
Well known examples are E Toro, Binance and Coinbase.
WHAT ARE WALLETS?
Wallets is where you store your crypto assets and there are currently two types:
Cold Wallet: These are not accessible via an internet connection. They are hardware wallets – like a USB device which removes the assets from the online account and stores offline.
Hot Wallet: A software wallet which is accessible via internet. These may be offered as part of the exchange site.
WHY ARE CRYPTOASSETS SO POPULAR?
There are several reasons why cryptoassets are being purchased and with social media platforms playing a pivotal role in how information is shared amongst consumers, the trend is growing rapidly. Third party consumer research conducted in 2020 indicated that there were two main factors why people invest.
- ‘SMASH AND GRAB’ – Cryptoassets are often perceived as a quick way of making money, with very little effort. Due to the market volatility whereby cryptoassets can sharply increase in value over a short period of time, many consumers are playing the market to their advantage to get their foot on the ladder or to supplement their existing income.
- ‘FOMO’ – The fear of missing out. Given the attraction cryptoassets is gaining, many participate as they don’t want to be that one friend who missed out on making a large gain.
Similarly, they are also concerned that if they don’t invest now, the values will be too high in the future and they don’t want to miss the opportunity.
TAXATION OF CRYPTOASSETS.
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