Whilst not a currency that is day to day use by most of us Bitcoin is still subject to HMRC tax regulations.
Bitcoin is the world’s first decentralised digital currency, otherwise known as a ‘cryptocurrency’. The advent of cryptocurrencies such as Bitcoin is a new and evolving area and determining their legal and regulatory status is ongoing. Cryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism.
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. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.
VAT treatment of Bitcoin and similar cryptocurrencies
As an EU tax, the VAT treatment for cryptocurrencies adopted by the UK must be consistent with any treatment that may eventually be implemented across the EU.
Given this, the evolutionary nature of these cryptocurrencies and the legal and regulatory environments in which they currently operate, this brief outlines HMRC’s provisional VAT treatment pending further developments; in particular, in respect of the regulatory and EU VAT position. Taxpayers can rely on the VAT treatment outlined below unless and until HMRC announces any changes. Any changes will not apply retrospectively.
For VAT purposes Bitcoin and similar cryptocurrencies will be treated as follows below, this in no way reflects on how they are treated for regulatory or other purposes:
- 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
- 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
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
CT, IT and CGT treatment of Bitcoin and similar cryptocurrencies
As with any other activity, whether 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 depends 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. 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.. 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.
- CT – 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 CT rules
- IT – 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: CT and CGT – 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 CGT if they accrue to an individual or, for CT on chargeable gains if they accrue to a company.
Given the evolutionary nature of these cryptocurrencies, it is very likely that HMRC will issue further guidance in future as the use of Bitcoin and other cryptocurrencies increases.