Cryptocurrency has been making waves in the financial world, offering a new way of conducting transactions and investing. However, as with any new technology, it comes with its own set of challenges and pitfalls. In a recent session with Jamie Nuttall titled Cryptocurrency - What You and Your Clients Need to Know - What It Really Means, Jamie gave insight into the world of crypto. What I found to be particularly interesting was his discussion on the pitfalls that accountants face when dealing with cryptocurrency.
Jamie explained that one of the primary pitfalls of cryptocurrency is the complexity associated with staking and beneficial ownership. In the world of Decentralised Finance (DeFi), ‘staking’ involves locking up your cryptocurrency to support the operations of a blockchain network. However, this process might lead to the loss of beneficial ownership, which could be considered a disposal for tax purposes. This complexity can lead to incorrect tax treatment and potential legal issues.
Another significant pitfall is the volatility of cryptocurrencies. While this can lead to high returns, it can also result in substantial losses. For instance, if you receive payment in Bitcoin and its value decreases significantly by the time you need to pay your taxes, you could find yourself unable to meet your tax obligations. Therefore, it's crucial to plan for tax payments and consider the potential volatility of the cryptocurrency market.
The third pitfall revolves around the security of cryptocurrencies. As they are unregulated, there's a risk of losing your investment due to hacks or scams. Moreover, the blockchain technology that underpins cryptocurrencies is still relatively new and not entirely foolproof.
Lastly, the lack of understanding and education about cryptocurrencies can also prove to be a problem. Many people dive into the world of cryptocurrencies without fully understanding how they work, the risks involved, or the tax implications. This lack of knowledge can lead to costly mistakes. It’s essential to educate yourself about cryptocurrencies before getting involved.
While cryptocurrencies offer exciting opportunities, they also come with their own set of pitfalls. It's crucial to understand these potential issues and take steps to mitigate them. Whether it's planning for tax payments, securing your investments, or educating yourself about the intricacies of cryptocurrencies, careful preparation can help you navigate the world of cryptocurrencies more safely and successfully. I’ve included a clip from Jamie’s session below:
To watch the full session by Jamie Nuttall just click here. In the session, Jamie covers the above as well as:
- An intro to Crypto assets
- CGT vs IT
- NFTs, Tokens and Coins
- Reporting and Tax planning
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.