2021 proved to be a volatile year for investments, particularly the cryptocurrency market.
With big names such as Bitcoin and Ethereum reaching their all-time highs at the back end of the 2021 calendar year, why is it that so many people have been talking about the crypto market?
The answers appear to be simple at first glance – everybody seems to know a ‘crypto millionaire’, and the potential to turn a small amount of cash into a digital retirement fund is clearly a tantalising one. The opportunities that cryptocurrencies may hold have piqued the interest of both seasoned and beginner investors.
So… What is a Cryptocurrency?
Cryptocurrencies, commonly referred to as just ‘Cryptos’ and ‘Crypto assets’, are a digital currency that can take the form of a ‘coin’ or ‘token’. The systems allow for peer-to-peer transfers which take place directly between users without the reliance on any central government or bank to be maintained and regulated. This means that assets can be transferred quickly, transparently and with lower fees than traditional banking.
The technology is underpinned and distributed on the ‘Blockchain’, which is a digital ledger of transactions managed by a network of computers, which track, trace, accept and reject transactions of crypto over time.
While the market may seem to be relatively niche now, it is growing rapidly with figures indicating that the adoption may be faster than the growth of the internet in its early years.
The first Bitcoin was mined in early 2009, but the concept of cryptocurrencies was introduced as far back as the 1980’s and 90’s. Due to a lack of public and government acceptance, the projects were halted and the innovation remained stagnant within the market until the white papers of ‘Bitcoin’ were released, outlining the original plan and protocol.
What is a Bitcoin?
Bitcoin has become a bit of a buzzword of the 21st century, but understanding how it is obtained, and subsequently used, could be key to understanding the world of Cryptocurrencies.
A network of computers keep the blockchain running by solving complex equations in a process called ‘Mining’. They mine bitcoins in chunks, called blocks, which effectively hold a record of all the recent transactions which have taken place on the network, as we discussed earlier.
The miners themselves receive payment in Bitcoin, which is a finite digital resource. It is for this, along with its many other functional benefits, that Bitcoin holds its value, like gold or other precious metals.
Bitcoin is somewhat of a faceless entity given that its developer, Satoshi Nakamoto, has never been personally revealed for any interviews or public appearances. It is presumed that this is just a pseudonym.
Although Bitcoin is a pioneer of the cryptocurrency ecosystem, it is not the only cryptocurrency available, nor is it the only protocol on the market – similar to how the GBP is currency, but not all currencies are GBP!
But, how will my crypto be taxed?
If you were fortunate enough to turn a profit on your digital portfolio, it may be that you need to appoint one of our crypto tax accountants to discuss your circumstances and calculate whether you have turned a taxable profit.
As a rule of thumb, any income whether it be from yield farming, staking or fixed APY would be subject to income tax, and selling your investments at a higher amount than they were bought for would be subject to capital gains tax rules – but this isn’t always so simple. You may benefit from working with a cryptocurrency accountant who specialises in crypto tax returns.
At Gorilla we have a dedicated and growing team of Crypto accountants, and if you’d like to talk to a member of the team about your current or future affairs, we’re on hand with expert advice.
For help with crypto accounting, join us today by clicking here, or speak to our team by calling 0330 107 9677.
This article is provided for information purposes only. It is not a recommendation or suggestion that the reader should invest in cryptocurrency or any other investment. This article is not financial advice or a financial promotion. Gorilla Accounting Limited does not purport to be financial advisors. All investments carry an element of risk, including the risk of losing all or some of the money you have invested. Prior to investing you should ensure that you are fully aware of all related risks and seek advice if required.
