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Update: U.K.'s HMRC Issues Official Document on Tax Treatment for Bitcoin

by Leon Pick
    Update: U.K.'s HMRC Issues Official Document on Tax Treatment for Bitcoin
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    As tax season rapidly approaches, Bitcoiners in the U.K. will be largely delighted to see that the tax authority has formalized its stance with a document on Bitcoin and cryptocurrency, exempting Bitcoin from multiple taxes (the following synopsis does not constitute any form of tax advice).

    Earlier, the Financial Times had reported that Her Majesty's Revenue and Customs (HMRC) is doing such, although no formal document from the authority could be located on the topic at the time. The authority's previous update on the matter was merely that they will be issuing guidance shortly.

    Taxes arising from Bitcoin can be divided into 5 categories:

    1. Bitcoin Mining
    2. Bitcoin Trading
    3. Bitcoin Exchange Operations
    4. Bitcoin Payment Processing
    5. Other Bitcoin Services

    The background statement puts cryptocurrency in a unique perspective and gives rise to the authority's lenient stance:

    "Bitcoin is seen as 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."

    Thus:

    Mining activity is exempt from VAT, because "there is an insufficient link between any services provided and any consideration received." What's more is that any income charged for other services in mining business is also exempt. Income tax on gains from mining is not explicitly discussed, though it most likely falls under the section discussing business income, which means such net income should be taxable. One would expect as well that electricity expenses shall count against revenues, especially since they have a huge impact on mining profitability and often render it entirely unprofitable.

    Bitcoin Trading: Gains/losses will be looked at "on a case-by-case basis taking into account the specific facts" and "depends on the activities and the parties involved". Highly speculative transactions may be compared to gambling, which is not taxable. Conversely, losses are not relievable as a capital loss. This differs from what was previously understood in that capital gains/losses are not taxable at all. However, for a corporation, it can be subject to capital gains/loss treatment just like foreign currencies traded against the company's functional currency.

    Exchange Operations: No VAT is due on the bitcoins exchanged with fiat, or even on any amounts over and above their value such as for commissions. In general, income from such and other business operations is subject to income tax.

    Payment Processing: similar idea

    Other Bitcoin Services: similar idea

    VAT must still be charged for the sale of goods and services purchased with bitcoins, as one may expect for similar purchases in barter. The amount of VAT is calculated based on the bitcoin value in sterling at the time of sale.

    As discussed in an earlier piece, the tax ramifications of Bitcoin can be far reaching. For example, how are we to treat "capital gains" (or business income) arising from the trading of mining power? Is it classified as a commodity or capital property?

    As tax season rapidly approaches, Bitcoiners in the U.K. will be largely delighted to see that the tax authority has formalized its stance with a document on Bitcoin and cryptocurrency, exempting Bitcoin from multiple taxes (the following synopsis does not constitute any form of tax advice).

    Earlier, the Financial Times had reported that Her Majesty's Revenue and Customs (HMRC) is doing such, although no formal document from the authority could be located on the topic at the time. The authority's previous update on the matter was merely that they will be issuing guidance shortly.

    Taxes arising from Bitcoin can be divided into 5 categories:

    1. Bitcoin Mining
    2. Bitcoin Trading
    3. Bitcoin Exchange Operations
    4. Bitcoin Payment Processing
    5. Other Bitcoin Services

    The background statement puts cryptocurrency in a unique perspective and gives rise to the authority's lenient stance:

    "Bitcoin is seen as 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."

    Thus:

    Mining activity is exempt from VAT, because "there is an insufficient link between any services provided and any consideration received." What's more is that any income charged for other services in mining business is also exempt. Income tax on gains from mining is not explicitly discussed, though it most likely falls under the section discussing business income, which means such net income should be taxable. One would expect as well that electricity expenses shall count against revenues, especially since they have a huge impact on mining profitability and often render it entirely unprofitable.

    Bitcoin Trading: Gains/losses will be looked at "on a case-by-case basis taking into account the specific facts" and "depends on the activities and the parties involved". Highly speculative transactions may be compared to gambling, which is not taxable. Conversely, losses are not relievable as a capital loss. This differs from what was previously understood in that capital gains/losses are not taxable at all. However, for a corporation, it can be subject to capital gains/loss treatment just like foreign currencies traded against the company's functional currency.

    Exchange Operations: No VAT is due on the bitcoins exchanged with fiat, or even on any amounts over and above their value such as for commissions. In general, income from such and other business operations is subject to income tax.

    Payment Processing: similar idea

    Other Bitcoin Services: similar idea

    VAT must still be charged for the sale of goods and services purchased with bitcoins, as one may expect for similar purchases in barter. The amount of VAT is calculated based on the bitcoin value in sterling at the time of sale.

    As discussed in an earlier piece, the tax ramifications of Bitcoin can be far reaching. For example, how are we to treat "capital gains" (or business income) arising from the trading of mining power? Is it classified as a commodity or capital property?

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