UPDATE (3rd February, 17:19 GMT): HMRC has now published an official brief, outlining its position on the tax treatment of income derived from bitcoin-related activities.
The UK’s tax agency has reversed an earlier ruling that classified virtual currencies as gift vouchers, exempting digital currency trading from a 20% value added tax (VAT).
HM Revenue and Customs (HMRC), the UK’s customs and tax department, has classified virtual currencies as assets or private money, not as vouchers that required a tax on the value of the coins.
Tom Robinson, co-founder of London-based digital currency storage specialist Elliptic and a director of the soon-to-launch industry group U.K. Digital Currency Association, lauded the decision by the tax agency, telling CoinDesk:
“I think this is the most progressive treatment of cryptocurrencies in the world. This is the most forward thinking and comprehensive advice in regards to taxation.”
HMRC had previously indicated it would consider rethinking its treatment of digital currency in December.
Reports say other taxes would still apply to businesses that buy, sell or exchange bitcoin. However, notably, bitcoin businesses will not be charged a tax on margins.
The news follows reports that the UK’s Payments Council, the organisation that sets strategy for payments, is assessing digital currencies, and amid increasing innovation from the local community that has seen the opening of bitcoin ATM alternatives and release of physical bitcoin price tags.
HMRC outlines new position in brief
In its formal Revenue & Customs Brief, published on Monday, the HMRC pointed out that for VAT purposes bitcoin and other digital currencies will be treated as follows.
- Income received from bitcoin mining activities will generally be outside the scope of VAT. This is due to the fact that mining does not constitute an economic activity for VAT purposes, as there is an insufficient link between any services provided and any consideration received.
- Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments.’
- When bitcoin is exchanged for Sterling or for foreign currencies, such as Euros or Dollars, no VAT will be due on the value of the bitcoins themselves.
- 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 under Article 135(1)(d) as outlined at 2 above.
With VAT out of the way, the HMRC turned to Corporation Tax, Income Tax and Capital gains Tax. It is important to note that there is no clear rule that applies to all activities and organisations. The brief explains:
“Each case will be considered on the basis of its own individual facts and circumstances. The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable.”
Businesses which accept payment in bitcoins will see no change in the way revenue is recognised and 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. We have not at this stage identified any need to consider bespoke rules.
- 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. Therefore no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in 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 income tax 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 Corporation Tax or Capital Gains Tax 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.
An open dialogue
Elliptic and other UK-based bitcoin businesses had earlier contacted the HMRC in an attempt to inspire UK lawmakers to rethink their classification of bitcoin, suggesting that the VAT would discourage UK consumers from investing in the ecosystem and make it harder for domestic companies to compete globally.
The result, however, was that HMRC opened up discussions with the community.
Robinson indicates that in early meetings, UK lawmakers asked questions about various digital currency activities, such as mining, though the larger focus was the overall taxation of the new currencies.
The news spread quickly across the bitcoin community, with many lauding it as a validation of bitcoin at a time when the industry is in need of good news.
Further, though undeniably positive, others in the community suggested that still more work needs to be done to ensure the growth of digital currencies in the UK.
The news is notable as most recent regulatory statements in the wake of operational issues at the now-bankrupt Japan-based exchange Mt. Gox had been trending negative. Vietnam became the latest to speak out against bitcoin this week, citing Mt. Gox specifically, though over the last month, a slew of countries – from Hungary to Cyprus to Kazakhstan – have all issued warnings.
Image credit: Value added tax visualization via Shutterstock