However, in addition to this din (not entirely unwarranted many would argue) one government body has begun to undo its earlier mistakes in the bitcoin space.
The body in question is the UK’s tax authority, HMRC, which this month effectively recognised bitcoin as a currency after months of lobbying by London’s bitcoin community, led by members of the soon-to-launch UK Digital Currency Association.
But will HMRC’s decision turn the UK into a leading centre for new financial services based around bitcoin or should those arguing for greater government engagement be careful what they wish for?
A sensible approach?
The positive arguments are obvious. HMRC has flip-flopped around the issue for months, first saying bitcoins were ‘taxable vouchers’ in November 2013, meaning that any purchase of bitcoin would require a VAT payment of 20% of the value of the bitcoin. This is the equivalent of paying €100 in tax if you wanted to buy €500 for your holiday in Spain.
Not long after, at the start of December 2013, they began to backtrack, beginning discussions with bitcoiners and indicating that they might reconsider their earlier position. At the time, Elliptic CEO Tom Robinson said:
“The general feeling I got from [our meeting with HMRC] was that they don’t think VAT should be levied on the bitcoin value itself.”
The fact that this was just weeks after HMRC decided the exact opposite indicates their rather haphazard approach to the role of cryptocurrencies.
Firing the starting gun
In their guidance issued on 3rd March, HMRC stepped back from explicitly recognising bitcoin as a currency, but their approach effectively treats it like any other form of payment for tax purposes:
“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.”
For Richard Asquith, Head of Tax at the TMF Group, this creates a stable framework that will encourage bitcoin businesses to look at the UK as a base for their operations. Other countries are going to have to come to a decision about how to tax bitcoin, he says:
“It’s going to force tax authorities around Europe and particularly the US to make a decision about how to tax it. The UK has fired the starting gun.”
Few other countries have taken a similar approach. Germany previously classed bitcoin as “private money”, while Singapore has classed it as a good, rather than a currency, and Russia has gone as far as to say bitcoin transactions are illegal, although they have allegedly softened their stance somewhat.
“HMRC’s decision is quite forward thinking in terms of other countries,” says Asquith. “It gives it the proper recognition for how it’s used in day-to-day activities.”
How much is 20%?
But before everyone breaks out the champagne, it should be remembered that there’s a lot that the guidance doesn’t cover.
For one, HMRC deals with tax issues, so their advice doesn’t even touch on the question of how bitcoin businesses might be regulated, unlike the New York Department of Financial Services (NYDFS), which recently announced they would begin regulating bitcoin exchanges.
Furthermore, the question of which exchange rate to use is still one that’s up for debate. HMRC merely says that merchants should use “sterling value of the cryptocurrency at the point the transaction takes place”, which is fine if you are using BitPay or Coinbase, merchant services that instantly convert bitcoin payments into fiat currency. However, if you are taking bitcoin from customers directly then you need to be careful, and consistent, about converting from bitcoin into sterling.
With the recent collapse of Mt. Gox and hacks of other exchanges, it would be dangerous for HMRC to pin their colours to any single bitcoin exchange, or even a group of exchanges says Richard Howlett, whose firm Selachii LLP is launching a lawsuit against Mt. Gox:
“If the government were to implicitly back an exchange, it could be disastrous. They’re not going to want people to think that ‘this is a safe place to trade my bitcoin’.”
Conversely, for fiat currencies HMRC currently publishes exchange rate figures from the Financial Times. As measures of the price of bitcoin become more established (for example, the CoinDesk Bitcoin Price Index), this should become less of an issue.
For now, merchants should choose a popular exchange and ensure they’re not moving around to get the best rate.
“You have to take the fair market value,” says Richard Asquith. “HMRC insist that you use the most popular exchanges and you stick to it.”
Giving bitcoin legitimacy
In a blog post published in response to HMRC’s guidance, Elliptic CEO Tom Robinson, who has arguably driven the change in policy, praised the tax authority, writing that they had taken “a thoughtful and logical approach” to cryptocurrencies.
At the same time, there doesn’t appear to be a consistent attitude towards bitcoin among the UK establishment. The Bank of England, for example, this week suggested that bitcoin is more like a commodity than a currency:
“Digital currencies … may have more conceptual similarities to commodities, such as gold, than money”
Aside from the practical implications, HMRC’s decision gives bitcoin a significant reputation boost. It’s even taxed like a currency, supporters in the UK can now say. Howlett agrees: “[HMRC is] acknowledging that this is something that’s here to stay.”
But if further government regulation is to follow, as Robinson’s post suggests, the next battle for bitcoin’s supporters is ensuring that it’s the “right” regulation. Indeed, getting bitcoiners to agree what regulation is welcome will likely be a challenge all in itself.
Future image via Shutterstock
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