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HMRC issues guidance on bitcoin

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Revenue & Customs Brief 09/14 explains that bitcoin is the world’s first decentralised digital currency, known as ‘cryptocurrency’. Bitcoin works via a peer to peer independent network which manages all functions such as issue, transaction processing and verification. Bitcoin may be held as an investment or used to pay for goods or services at merchants where it is accepted. A number of outlets in the UK accept bitcoin. All bitcoin transactions are recorded in a shared public database called a ‘block-chain’. New bitcoin is produced when a new block is attached to the chain. A new block can only be added to the chain when the answer to a complex cryptographic algorithm is solved. Participants in this activity are known as ‘miners’.

As VAT is a European tax, the brief outlines HMRC’s provisional VAT treatment pending further developments at the EU level. Here, the brief states that:

  • income received from bitcoin mining activities is exempt as there is no economic activity in the absence of a sufficient link between services supplied and consideration;
  • other services such as verification are exempt under the banking exemption (Sixth VAT Directive, art 135);
  • on the exchange of bitcoin for other currencies, no VAT is due;
  • charges for arranging or carrying out transactions are exempt under the banking exemption; and
  • VAT will be due in the normal way when bitcoin is used as a currency to purchase goods and services.

The corporation tax, income tax and CGT treatment is as follows:

  • payment for goods and services with bitcoin will not affect the timing of any liability to tax;
  • for corporation tax, the rules on foreign exchange gains and losses and on loan relationships apply to profits and losses on exchange movements, by reference to the exchange rate between bitcoin and the company’s functional currency;
  • for income tax, again profit and losses arising from bitcoin transactions should be reflected in the normal way; and
  • corporation tax on chargeable gains or CGT may apply if a profit or loss on a currency contract is not within trading profits – or within the loan relationship rules.

Commenting on the news, Richard Asquith, head of TMF’s VAT & IPT services, said: ‘This new regime represents probably the most tax-friendly and constructive regime in the world for bitcoin traders, and will help attract business from other jurisdictions. This may in turn force them to bring forward tax guidance, especially from the IRS in the US.’

Issue: 1207
Categories: News , Corporate taxes , Indirect taxes , VAT