The Bitcoin is a new system of payment and the world’s first decentralised digital currency, also known as a “cryptocurrency”. The introduction of cryptocurrencies such as Bitcoin is an innovative and developing area and their legal and regulatory status has not been established yet.
Owing to their unique identity, cryptocurrencies cannot be directly compared to any other form of investment activity or means of payment.
Although Bitcoin transactions have been declared as illegal in some countries, and other countries have disallowed their banks from handling the currency, Bitcoin is available to use in the UK.
Consequently, there are taxation impacts here too.
Here, we will discuss the taxation implications of Bitcoin in the UK.
Bitcoin Activity – Just a Hobby or a Trade?
Questions are now being asked about Bitcoin activity, on whether this should be considered a hobby or trading.
There have been several tribunal cases on the issue. It is important to mention here that a hobby does not fall within the ambit of the taxation system, but trading does. Hence, the labelling of Bitcoin activity as either a trade or a hobby is going to be a determining factor in the consideration process of its tax position.
Speculative Bitcoin activity
The HMRC guidance states that depending on the circumstances, the transactions may be so highly estimated, that it may not have tax liabilities, nor any losses recorded can be entitled for relief. For instance, gambling or betting wins are not chargeable and gambling losses cannot be compensated by other taxable profits.
Gambling is normally not within the ambit of tax and so this ‘tax free’ treatment will be applied to Bitcoin activity.
HMRC says that the evaluation of whether or not a profit or gain is taxable, or loss allowable, will be case-specific.
Before setting out on a venture, potential investors should seek guidance on whether their activities would be considered a trade.
Bitcoin – The Taxation Implications In The UK
HMRC understands that Bitcoin operates via a peer to peer network, independent of any central authority or bank.
All functions such as issue, transaction processing and verification are managed collectively by this network. All Bitcoin transactions are recorded in a shared public database called a ‘block-chain’.
New Bitcoin is produced when a new block is attached to the chain. A new block can only be added to the chain when the answer to a complex cryptographic algorithm is solved. Participants in this activity are known as ‘miners’.
As well as mining, activities include the buying and selling of Bitcoin and providing exchange facilities for parties to trade Bitcoin with recognised currencies. Bitcoin may be held as an investment or used to pay for goods or services at merchants where it is accepted.
VAT Treatment of Bitcoin and Similar Cryptocurrencies
As an EU tax, and notwithstanding pending Brexit negotiations, the VAT treatment for cryptocurrencies adopted by the UK must be consistent with any treatment that may eventually be implemented across the EU.
Income received from Bitcoin mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.
Charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin, will be exempt from VAT.
However, in all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrency. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place
Corporation Tax, Income Tax and Capital Gains Tax treatment of Bitcoin and Similar Cyptocurrencies
The treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies will be subject to CT, IT or CGT depending on the activities and the parties involved.
Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts. Each case will be considered on the basis of its own individual facts and circumstances.
Depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.
For businesses which accept payment for goods or services in Bitcoin there is no change to when revenue is recognised or how taxable profits are calculated.
Corporation Tax – the profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply.
For companies, exchange movements are determined between the company’s functional currency (usually the currency in which the accounts are prepared) and the other currency in question. If there is an exchange rate between Bitcoin and the functional currency then this analysis applies.
The profits and losses of a company entering into transactions involving Bitcoin would be reflected in the accounts and taxable under normal Corporation Tax rules
Income Tax – the profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal IT rules
Chargeable gains: Corporation Tax and Capital Gains Tax – if a profit or loss on a currency contract is not within trading profits or otherwise within the loan relationship rules, it would normally be taxable as a chargeable gain or allowable as a loss for CT or CGT purposes.
Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for Capital Gains Tax if they accrue to an individual or, for Corporation Tax on chargeable gains if they accrue to a company.
Bitcoin is Still Experimental
Bitcoin is an experimental new currency that is in active development. During the this period of hyper monetisation you might encounter increased fees, slower confirmations, or even more severe issues.
Be prepared for problems and consult a technical expert before making any major investments, please keep in mind that nobody can predict Bitcoin’s future.
The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets.
Consequently, keeping your savings with Bitcoin is not recommended at this point. Bitcoin should be seen like a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin.
Protect yourself at all times, take responsibility for your own financial affairs and never speculate any cash you cannot afford to lose. In 2017 you will need to be a massively sophisticated Bitcoin expert to have any chance of understanding what is going on.