Accepting cryptocurrency as payment – The tax implications for UK SMEs

One in five of the UK’s top SMEs is already seeing customer demand for cryptocurrency payments, according to a recent survey by payment technology provider DECTA.

Whether you are considering accepting crypto or have already started doing so, understanding how it is accounted for and taxed is essential before you go further.

How is cryptocurrency treated for accounting purposes?

HMRC does not treat cryptocurrency as currency or money. Instead, cryptoassets are treated as intangible assets on the balance sheet, held at cost.

This has important implications for how transactions are recorded and when tax liabilities arise.

When your business accepts cryptocurrency as payment for goods or services, the value of that payment must be converted to sterling at the time of the transaction.

That sterling value is what you recognise as income and it forms the cost basis of the cryptoasset you now hold.

It is also worth noting that if your business pays employees or contractors in cryptocurrency, HMRC treats this as a payment in kind.

Income Tax and National Insurance contributions apply based on the sterling value at the date of payment and your payroll obligations remain exactly the same as they would for a cash salary.

What happens when you dispose of the cryptocurrency?

Every time your business disposes of a cryptoasset, whether by selling it, exchanging it for another cryptocurrency or using it to pay a supplier, a disposal event occurs for Corporation Tax purposes.

If the value of the cryptoasset has risen between receipt and disposal, your business will have made a chargeable gain or if it has fallen, you will have a capital loss.

Given the well-documented volatility of cryptoassets, these movements can be substantial and must be accounted for.

Of course, like many other losses, a fall in the value of the cryptoasset you hold at the point of disposal can be offset against other chargeable gains in the same period or carried forward to reduce future liabilities.

This is why keeping accurate records matters in both directions, as it may create opportunities to minimise your Corporation Tax liability.

HMRC requires businesses to keep detailed records of every transaction, including the date, the sterling value at the time of receipt and the sterling value at the point of disposal.

Where a business holds multiple units of the same cryptoasset acquired at different prices, pooling rules apply to calculate the average cost. This is broadly similar to the share pooling rules used for investment assets.

The volatility problem

Anyone who has any knowledge of cryptocurrency markets knows that they are fairly volatile.

Prices can go up and down by considerable amounts in a relatively short amount of time.

The immediate concern is the impact on turnover and cash flow, but this volatility also creates a level of tax uncertainty that does not exist with conventional payment methods.

A payment received in Bitcoin today could be worth significantly more or less by the time you convert it.

Businesses that hold cryptoassets rather than converting them immediately are effectively taking on an investment position, with all the tax complexity that entails.

A clear policy on how quickly received crypto is converted to sterling can help keep that exposure manageable.

Ultimately, you may decide that accepting cryptocurrency is too complex and/or risky, but that doesn’t mean the demand from consumers for this payment method doesn’t increase.

Speak to us before you start accepting crypto

If customers are asking to pay in cryptocurrency, it is worth taking advice before you make this an accepted payment method for your business.

The tax position is manageable, but the recordkeeping requirements are demanding and the consequences of getting it wrong can be costly.

We can help you put the right processes in place from the outset to ensure you are compliant and understand the risks associated with this payment method.