Cryptocurrency payments: Complex tax treatment


The eventual acceptance of cryptocurrency payments by micro and small businesses in the UK is almost certain as regulation supports increases to safety and stability. Let’s take a look at what this means for those businesses, the complex tax treatment of the assets, increased reporting, and more.

A few years ago investor Warren Buffett was quoted warning people to stay away from cryptocurrencies: “…generally, I can say almost with certainty that they will come to a bad ending”. I wonder what his thoughts are now.

Conversely, PayPal co-founder Peter Thiel, said that Bitcoin has the potential “to change the world”.

Who’s right? And what does it mean for businesses that may already be asking if they should accept payments in non-fiat currency such as crypto and non-fungible tokens (NFTs). 

Digital representations of value

So how do cryptocurrencies work. 

The Financial Conduct Authority says crypto “can be thought of as ‘digital representations of value or rights’ that are secured by encryption and typically use some type of distributed ledger technology (DLT). DLT allows data to be recorded and stored across a network of participants”.

Let’s break this down:

The value or rights are stored in a unique digital ‘wallet’ that has its own code (or key) to authorise transactions. Wallets can also be kept offline (on hardware) for extra security.

In the scenario of a micro or small business accepting cryptocurrency payments, the purchaser would use a cryptocurrency platform to send instructions to transfer cryptocurrency to the business. Anyone using the network can view the message (which is one part of the appeal of the blockchain – it’s hard to forge changes). 

Miners then group that transaction with other recently sent transactions into a block, and information from that block is transformed into a cryptographic code. Miners compete to find the code and, once solved, the block is added to the blockchain, the transaction is confirmed and then the business receives the payment.

Types of cryptocurrencies

NFTs are just one form of cryptocurrency. Whereas currencies such as Bitcoin are identical units that can be replicated indefinitely, NFTs are completely unique and can be anything that can be digitalised – a piece of art, music, even a tweet. The highest price paid for an NFT so far is US$91.8m. It has been said that cryptocurrencies have no intrinsic value – however, they are actually worth what people are willing to pay for them in the market; but of course, there is volatility. However, HM Treasury recently announced plans to introduce regulation to mitigate that volatility risk (among others) by positioning “the UK as a safe jurisdiction for cryptoasset activity to take place, fostering innovation and providing firms clarity over the planned regulatory framework”. I am currently waiting for the outcome of the second consultation launched in relation to taxation of Defi.

Currently, it’s a choice on how a business accepts payment.

Businesses that include traders, investors, blockchain developers and social media influencers, given the industry they operate in, are able to make payments using cryptocurrency.

They have the option to receive payment in this manner, and the funds are deposited into a business digital wallet. These funds are easily accessible and can be converted into fiat currency (should they wish to do so), much like receiving income in USD or Euro.

Accepting payments into a secure digital wallet in a different currency is comparable to receiving payment via PayPal in various currencies. 

Professional advice important

When it comes to tax, things do get more complex.

UK small and medium limited companies that engage in cryptocurrency trading or hold cryptocurrencies as assets must take into consideration the tax implications of their activities.

The tax treatment of cryptocurrencies in the UK is complex and varies depending on the specific circumstances of the business entity. Ltd companies pay Corporation Tax on their chargeable gains and income received (from sales, mining, staking)

There is also the extra reporting to consider.

UK SME limited companies that trade in cryptocurrency or accept cryptocurrency payments may be subject to additional reporting requirements, including Anti-Money Laundering regulations. It is important for SMEs to seek professional advice and ensure that they are compliant with the relevant laws and regulations to avoid penalties, fines and possible legal action.

Clients will also most definitely need to consider increased security measures if they are thinking of accepting crypto. Any third-party service providers they use, such as cryptocurrency exchanges or custodian wallet providers, MUST have robust security measures in place and be compliant with relevant laws and regulations. 

It would also be wise to consider storing a portion of their cryptocurrency holdings in cold storage, such as a hardware wallet, to safeguard against online attacks. 

All signs point to eventual acceptance of cryptocurrency by small businesses in the UK. 

HM Treasury announced last year plans to make Britain “a global hub for cryptoasset technology and investment”.

“The government intends to legislate to bring stablecoins – where used as a means of payment – within the payments regulatory perimeter, creating conditions for stablecoins issuers and service providers to operate and invest in the UK,” the announcement said, citing reliability and safety as reasons for regulation.

So let’s watch this space and continue to keep educated via DBM Academy. Join me for my tax workshops to stay updated. Subscribe here


Delriene Smith

Boss Money Moves

Founding DBM Coach