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Bitcoins and Taxes

16th December 2013

There has been a lot of news recently about Bitcoins, the virtual currency that has seen a meteoric rise over the past year. It is a complicated concept – people understand what a fiver is, and what you can buy with it, but trying to explain that a sequence of 1s and 0s on a hard drive somewhere was worth 30 times that at its peak in November is a different kettle of fish entirely.

The widening public awareness of this has resulted in discussions amongst tax experts as to the treatment of them with regards to capital gains tax, income tax and VAT. It all boils down to whether it is viewed as a currency or not.

As a currency

If bitcoins are considered a currency, equivalent to the dollar or sterling, then there are no UK VAT implications on ‘buying’ them. After all, you don’t pay VAT when changing money into euros for your trip to Spain, do you?

One country that appears to have firmly decided that it is a currency is Canada, who host the world’s first Bitcoin ATM. Additionally, the US Senate was told that Bitcoins were a ‘legitimate financial service’.

However there are concerns over the use of Bitcoins in money laundering – particularly as there is no register of who owns them. The European Banking Authority announced that thefts from digital wallets had exceeded $1m, calling for greater regulation of the business, and the Chinese central bank have issued a warning that the currency lacks ‘real meaning’ and is not protected.*

As an asset, good or service.

Norway has recently declared that it is an asset, and will be liable for capital gains tax on disposal.  Their Scandinavian brethren in Sweden are treating it as a service (all digital goods are treated as services), and thus any purchases using bitcoins are technically bartering transactions, and will be VATable.

What about the UK?

Up until recently, HMRCs view on Bitcoins is that they are ‘taxable vouchers’ and therefore liable to VAT. Thus, anybody trading bitcoins with a turnover exceeding the threshold (£79,000 per year), will have to register for VAT, and charge 20% on the current price, putting UK sellers at a disadvantage compared to the rest of the world.

However, following a meeting between UK Bitcoin pioneers and HMRC, there is speculation that this definition may be changed. As of writing, however, no formal announcement has been made.

There needs to be a clear definition made, and supported by a global consensus.

*UPDATE 19.12.2013 – The price of bitcoins halved overnight as China’s largest exchange stopped accepting any new yuan deposits. This is not the first time that there has been a “shock” to this fledgling entity and it remains to be seen whether it will once again mount a recovery.