Cryptocurrencies, in particular Bitcoin are becoming increasing popular. If you are making charges in or receiving income from cryptocurrencies – or planning to, what do you need to consider when it comes to HMRC?
What is Bitcoin?
Bitcoin is the World’s first digital currency. You can’t hold it in your hand, pop it in your purse or hide it under your mattress! It’s something that is becoming increasingly popular, yet many of us have no actual experience of it.
Bitcoin operates via a ‘peer-to-peer’ network. There is no-one in overall control. No governance, no bank. It’s alien to many of us. The network manage all activities. Transactions are recorded in a database known as a ‘ Block Chain.’ New Bitcoin are produced when a new block is added to the chain. Blocks can only be added to the chain when a complex algorithm is solved. The people solving the algorithms are called “ miners.”
So, you can be a miner who is rewarded with bitcoins when they solve the algorithm, adding a block to the block chain. Or, you can buy and sell Bitcoin and also provide exchange facilities to trade Bitcoin with recognised currencies such as Sterling and Euros.
People are holding Bitcoin as an investment and making a lot of money from it. You can also use Bitcoin to pay for goods and services. You might find this hard to believe but Bitcoin is already accepted by a number of retailers in the UK as well as pubs, restaurants and also Amazon and Expedia.
This is the current HMRC position:
‘Income received from Bitcoin mining activities will
generally be outside the scope of VAT on the basis that
the activity does not constitute an economic activity for
VAT purposes because there is an insufficient link
between any services provided and any consideration
‘Income received by miners for other activities, such as
for the provision of services in connection with the
verification of specific transactions for which specific
charges are made, will be exempt from VAT under Article
135(1)(d) of the EU VAT Directive as falling within the
definition of ‘transactions, including negotiation,
concerning deposit and current accounts, payments,
transfers, debts, cheques and other negotiable
When Bitcoin is exchanged for Sterling or for foreign
currencies, such as Euros or Dollars, no VAT will be due on the value of the Bitcoins themselves.
Charges (in whatever form) made over and above the
value of the Bitcoin for arranging or carrying out any
transactions in Bitcoin will be exempt from VAT under
Article 135(1)(d) as outlined at 2 above
However, VAT is due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin/other cryptocurrencies. The amount of VAT due will be the sterling value of the Bitcoin/other cryptocurrency, at the point the transaction takes place.
What about Corporation Tax, Income Tax and Capital Gains Tax?
This depends on the income received and charges made as well as the activities undertaken and the people involved with the cryptocurrencies.
According to HMRC:
‘Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts. Each case will be considered on the basis of its own individual facts and circumstances.
The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable.. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.’
For businesses which accept payment for goods or services in Bitcoin there is no change to when revenue is recognised or how taxable profits are calculated.
• CT – the profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply. Therefore no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under normal CT rules
• IT – the profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal IT rules
• Chargeable gains: CT and CGT – if a profit or loss on a currency contract is not within trading profits or otherwise within the loan relationship rules, it would normally be taxable as a chargeable gain or allowable as a loss for CT or CGT purposes. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for CGT if they accrue to an individual or, for CT on chargeable gains if they accrue to a company.
Is that all clear?! Let’s not forget that these cryptocurrencies are relatively new and as such are evolving. The above guidance is the current HMRC position, which of course is subject to change.
If you are thinking of dabbling in Bitcoin, do your research thoroughly. That’s the best advice I can give.