Tax treatment of activities involving Bitcoins

HMRC has recently published guidance setting out their position on the tax treatment of certain transactions relating to the sale or use of Bitcoins and other similar cryptocurrencies. The guidance is relevant for Bitcoin miners, Bitcoin traders, Bitcoin exchanges, Bitcoin payment processors and other Bitcoin service providers.

What is Bitcoin?
Bitcoin is a digital currency and is known as a cryptocurrency. The Bitcoin operates independently of any central authority or bank and all transactions are recorded in a shared public ledger called a ‘block-chain’. The block-chain records every Bitcoin transaction and a change in ownership of a Bitcoin must be registered for it to take effect. For every block that is added to the block-chain the user receives a number of Bitcoins. This is known as ‘mining’.    

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 where the business accepts Bitcoin as payment.

Some countries have declared Bitcoin transactions as illegal and other countries have banned their banks from handling the currency. Bitcoin remains available to use in the UK and its increasing popularity means that more and more transactions are taking place and the VAT, income tax, capital gains tax and corporation tax treatment need to be considered. 

Prior to the recent guidance, HMRC are understood to have viewed Bitcoins and other virtual currencies as vouchers and were therefore subject to VAT. However, due to the fluctuating value of Bitcoins, HMRC have clarified their position in HMRC Brief 09/14. The recently published HMRC guidance confirms that:

  • income received for Bitcoin mining activities will generally be outside the scope of VAT

  • income received by miners for other activities, for example, charges in connection with the verification of specific transactions, will be exempt from VAT because they fall within the definition of 'transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments'

  • when Bitcoins are exchanged for sterling or for a foreign currency, no VAT will be due on the value of the Bitcoins themselves

  • charges made in excess of the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT

Where supplies of goods or services are made and payment is made with Bitcoins, VAT will be due in the normal way and will be based on the sterling value of the Bitcoins at the point of sale.

Supporters of Bitcoin had been calling for HMRC to reconsider their view that the cryptocurrency is subject to VAT and so the recent guidance should prove welcome news for many businesses.

However, because VAT is a tax that is applied across the EU, any VAT treatment for cryptocurrencies in the UK must be consistent with EU treatment. HMRC’s guidance is therefore provisional and may be subject to change. However, any changes made will not apply retrospectively.

Income tax, capital gains tax and corporation tax
When looking at activities involving Bitcoins and other cryptocurrencies,  the income tax, capital gains tax and corporation tax treatment will depend on the activities taking place and the parties involved, in the same way that transactions which involve a normal currency, such as sterling, are determined. 
There are no special rules for transactions involving Bitcoins for income tax, capital gains tax and corporation tax purposes. The following rules will therefore all apply:

  • Corporation tax: The profits or losses on exchange movements between currencies, including virtual currencies, are taxable in accordance with the general rules on foreign exchange and loan relationships

  • Income tax: The profits and losses of a non-incorporated business will be taxable under normal income tax rules.

  • Chargeable gains and losses: If a profit or loss on a currency contract is not within trading profits or within the loan relationship rules it will be chargeable or allowable for capital gains tax if it accrues to an individual or, for corporation tax on chargeable gains if it accrues to a company.

  • Where a business accepts payment for goods or services in the form of Bitcoins, there will be no change in the way taxable profits are calculated – it is to be treated in the same way as a payment made in sterling.

The tax treatments above are based on HMRC’s current guidance and may be subject to change. Moore Stephens will of course publish updates as necessary. For more information on the tax treatment of Bitcoin transactions please contact your usual Moore Stephens adviser.

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