Richard Asquith considers HMRC’s rethink on the taxation of bitcoins
Is the bitcoin the next investment bubble or a revolution in global payments? Whatever the outcome for the plethora of emerging digital currencies, HMRC is rethinking its position.
At the end of 2013, HMRC confirmed that it intends to amend its tax treatment of the flourishing digital currency market. This re-evaluation has come after market participants threatened to move trading out of the UK to the European continent, and as HMRC began to appreciate the potential new revenue opportunity. Consider this, in the last twelve months, the principle digital currency, bitcoin, has grown globally from less than £700m to almost £10bn.
Along with most countries, the UK equivocated throughout 2013 on the tax categorisation of bitcoins. This was largely down to a lack of understanding of the use of the cryptocurrency, and the activities of the many independent online traders that have sprung up. Eventually, in November, it issued guidance that it considered bitcoins as a face value voucher. This would leave bitcoins potentially liable to 20% VAT on each sale based on FA 2012, which included an amendment that required a VAT charge on single use vouchers following the ruling of the CJEU in the Lebara phonecard VAT case (C-520/10).
Following its November written guidance, many of the UK’s bitcoin traders approached HMRC to lobby for a change of interpretation. In particular, they claimed that bitcoins were a re-tradable item, and could be used for the purchase of many items and goods. The final VAT treatment was therefore not determinable at the time of an exchange, and therefore digital currencies were not single-use vouchers subject to VAT.
HMRC has now confirmed that its initial interpretation was incorrect, and that it is taking legal advice on the way forward. The outcome of this may be issued as soon as February.
It is still not certain which direction HMRC will go. It is highly unlikely that it will categorise bitcoins as a full currency, making the use and trading fully exempt from VAT or most other taxes. To do so would effectively put it on a par with sterling and other national currencies, which, given the lack of credible financial backing to the currencies, would be out of the question.
Instead, it may place it in the same league as major tradable commodities – in particular, gold. This would give it ‘private currency’ status, as opposed to ‘fiat money’ issued by governments. This would likely mean that the exchange of bitcoins by independent traders would be exempt from VAT. This would follow a similar pattern to the tax regime employed to gold, which was exempted from VAT in 2000 because of varying tax treatments across Europe which created market distortions. Gold is therefore exempt in the same way that trading in shares is. There would though be a potential VAT liability on any trade exchange’s commission.
Trading by individuals would potentially be subject to CGT. However, in Germany recently, an exemption from its 25% CGT was given for any bitcoins held for longer than one year, a measure that recognises bitcoin’s use as a long term store of wealth. Such a concession could also be given by HMRC.
There is so far very limited tax determination on digital currencies from other countries around the world. Most notably, the US IRS has yet to put forward any thinking on the tax liabilities of bitcoins. The largest market last year was China, but it has recently banned the use of bitcoins, although this may soon change.
HMRC therefore has an interesting challenge ahead as it looks to ‘coin’ the world’s tax treatment on digital currencies.
Richard Asquith considers HMRC’s rethink on the taxation of bitcoins
Is the bitcoin the next investment bubble or a revolution in global payments? Whatever the outcome for the plethora of emerging digital currencies, HMRC is rethinking its position.
At the end of 2013, HMRC confirmed that it intends to amend its tax treatment of the flourishing digital currency market. This re-evaluation has come after market participants threatened to move trading out of the UK to the European continent, and as HMRC began to appreciate the potential new revenue opportunity. Consider this, in the last twelve months, the principle digital currency, bitcoin, has grown globally from less than £700m to almost £10bn.
Along with most countries, the UK equivocated throughout 2013 on the tax categorisation of bitcoins. This was largely down to a lack of understanding of the use of the cryptocurrency, and the activities of the many independent online traders that have sprung up. Eventually, in November, it issued guidance that it considered bitcoins as a face value voucher. This would leave bitcoins potentially liable to 20% VAT on each sale based on FA 2012, which included an amendment that required a VAT charge on single use vouchers following the ruling of the CJEU in the Lebara phonecard VAT case (C-520/10).
Following its November written guidance, many of the UK’s bitcoin traders approached HMRC to lobby for a change of interpretation. In particular, they claimed that bitcoins were a re-tradable item, and could be used for the purchase of many items and goods. The final VAT treatment was therefore not determinable at the time of an exchange, and therefore digital currencies were not single-use vouchers subject to VAT.
HMRC has now confirmed that its initial interpretation was incorrect, and that it is taking legal advice on the way forward. The outcome of this may be issued as soon as February.
It is still not certain which direction HMRC will go. It is highly unlikely that it will categorise bitcoins as a full currency, making the use and trading fully exempt from VAT or most other taxes. To do so would effectively put it on a par with sterling and other national currencies, which, given the lack of credible financial backing to the currencies, would be out of the question.
Instead, it may place it in the same league as major tradable commodities – in particular, gold. This would give it ‘private currency’ status, as opposed to ‘fiat money’ issued by governments. This would likely mean that the exchange of bitcoins by independent traders would be exempt from VAT. This would follow a similar pattern to the tax regime employed to gold, which was exempted from VAT in 2000 because of varying tax treatments across Europe which created market distortions. Gold is therefore exempt in the same way that trading in shares is. There would though be a potential VAT liability on any trade exchange’s commission.
Trading by individuals would potentially be subject to CGT. However, in Germany recently, an exemption from its 25% CGT was given for any bitcoins held for longer than one year, a measure that recognises bitcoin’s use as a long term store of wealth. Such a concession could also be given by HMRC.
There is so far very limited tax determination on digital currencies from other countries around the world. Most notably, the US IRS has yet to put forward any thinking on the tax liabilities of bitcoins. The largest market last year was China, but it has recently banned the use of bitcoins, although this may soon change.
HMRC therefore has an interesting challenge ahead as it looks to ‘coin’ the world’s tax treatment on digital currencies.
