The world of cryptocurrency is risky, but it’s not just the volatility of the market that investors need to be wary of. The lack of regulation has provided a new arena for scammers to take advantage of investors tempted into the market by talk of large returns.
Increasingly, individuals entering the world of cryptocurrency have been drawn into the space by news of huge returns made from investments in little known cryptocurrencies and tokens.
In the last three months alone, the number of cryptocurrency coins listed on the website CoinMarketCap has increased by over 4,000 taking the total to over 16,000 coins. However, this increase reflects the ease with which someone can now create a coin, rather than a surge in the development of blockchain technology.
Perhaps the biggest driver of this has been the rise in 2021 of meme tokens (i.e. tokens with no or limited utility and often as an inside joke of the developers). In particular, the meme token Shiba Inu, the dog-inspired coin created as a challenger to Dogecoin, rose by over 28 million percent in 2021, making millionaires of those who invested £5 on 1 January 2021. Scammers have been keen to jump on the bandwagon and create their own meme coins, with websites emerging that allow anyone to create their own cryptocurrency coin with minimal effort.
These “scam coins” are often designed to allow individuals to invest their funds but prevent them from selling them. The original coin creators can then withdraw all the investors’ funds to their own account. The creators of the coin Squid Game, which appeared to be inspired by, but has no official association to the popular Netflix series, were accused of such a scam and alleged to have walked away with over $3 million of investors’ funds.
Unfortunately for investors, they face a struggle to benefit from any tax relief to offset the loss of their invested funds. As they are unable to actually sell the coin, they cannot crystallise a loss for capital gains tax purposes.
The investor therefore needs to make a claim to HMRC that their investment is now of ‘negligible value’. Such a claim is usually made alongside a tax return and requires that the asset is now “worth next to nothing”. That may be trickier to prove than it initially appears, as these scam coins may continue to exist and on paper, may have some value, but the investor is unable to access that value as they are prevented from selling.
It remains to be seen how HMRC will respond to such claims, but for any chance of success, taxpayers will need to provide evidence to prove they have been the victim of such a scam, and therefore there is no realistic prospect of being able to sell their investment in the future. This may prove challenging, leaving cryptocurrency investors out of pocket.