Bitcoin UK tax review to give currency global boost

Her Majesty's Revenue and Customs (HMRC) in the UK is reviewing the possibility of easing the tax liability for the trading and use of the virtual digital currencies, including Bitcoin, in the next month.

The move would re-categorise Bitcoin as a ‘private currency’ instead of a tradable voucher, eliminating the heavy profits tax uncertainties and leaving a reduced VAT (Sales Tax) liability. This would give the UK Bitcoin industry a significant competitive advantage.

Other European countries, the US and China are still hesitating on their tax positions, which is threatening the growth of Bitcoin. Last week, Singapore changed its rules to something similar to those which HMRC are reviewing.

Countries wavering on how to tax Bitcoin

Since its emergence in 2009, countries around the world have hesitated on how to capture tax revenues on the trading and profits of Bitcoin (and other virtual currencies).

There are three favoured options:

  1. Tax as a face-value voucher to buy goods and services. This incurs full VAT on the value of the Bitcoin sold which the seller must charge to the buyer. This is the current treatment by HMRC which defined its position in November 2013. It creates a huge tax burden (20% VAT on each use of Bitcoins), and has helped kill off the UK market. It is also the methodology applied in other European countries that have published any guidance.
  2. Tax as ‘private money’. This would eliminate any profits tax (including Capital Gains Tax). Only VAT on the commission charged by any trading exchanges would arise. This would result in a minimal tax liability for the whole industry and users of Bitcoin. Germany is moving in this direction following a parliamentary inquiry (summer 2013) which exempted Bitcoins from 25% CGT.  However, there is no clarification as to whether there is still a full VAT liability.
  3. Treat Bitcoins as a full currency and a ‘financial service’, which is completely exempt from VAT. This is unlikely ever to be applied as it would give Bitcoin the status of a national currency.

UK looking to re-categorise shortly

Following industry lobbying, HMRC is now considering a switch of Bitcoin’s status under UK law from being a voucher to being private money. It is expected to agree that Bitcoins are not a single use voucher, and is re-tradable money. A decision may come out by early February.

Head of Tax Richard Asquith commented: “Whilst Europe dithers on the tax status of virtual currencies, there is an opportunity for the UK to clarify the tax risks and enable exchanges to open and flourish. But ironically it would move Bitcoin away from its original aspiration to be a global, unregulated currency. The US’ IRS has not yet issued any guidance on its tax treatment for digital currencies, but the explosive growth of the currency, and therefore rising tax avoidance risks, will probably force some initial regulation early this year.”

TMF Group experts 
Article

Keeping up to date

You can now receive our insights and regulatory updates direct to your inbox by choosing the topics and jurisdictions that most interest you. 

Subscribe to our e-Alerts.