A recent publication from HMRC (Revenue & Custom Brief 09/14) shows that HMRC and the UK are favourable towards Bitcoin businesses and the emerging Crypto-currency economy.
From summer of 2013 there has been concern as to whether HMRC (Her Majesty’s Revenue & Customs, the UK tax office), would be forcing merchants, vendors (only sells bitcoin) and brokers (buys and sells bitcoins), to add on 20% to the value at which they were selling their Bitcoins, as Value Added Tax (VAT) for tax purposes.
As numerous Localbitcoin sellers and other brokers have stated, this would have created huge mark-ups for their merchandise, making them unable to compete with the surrounding market.
The following practices implemented are specifically designed to cover “Bitcoin miners, traders, exchanges, payment processors and other Bitcoin service providers”.
For those Bitcoiners who take part in Bitcoin Mining, all mining income from Bitcoin (and other crypto-currencies) will be classified as exempt from tax, meaning that it remains untaxed.
Bitcoins and Crypto-currency themselves do not count as Capital Gains for the purposes of Capitals Gains Tax (CGT). It is only at the point of conversion to fiat that CGT becomes recognizable (when to pay).
Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for Capital Gains Tax if they accrue to an individual or, for Corporation Tax on chargeable gains if they accrue to a company.
So if miners keep their mined Bitcoins as Bitcoins (or other similar Crypto-currency), then they are not liable to CGT. However, it is very understandable that in today’s world, most miners have to convert their mined coins to meet their various needs that can only be met with fiat.
1.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 received.
Items bought with crypto-currency will not be liable for CGT, unless those items are then sold onwards (for a profit) for GBP. The profit made is liable for CGT, it becomes a tricky situation if the GBP value is kept entirely out of the equation. Though keep in mind, that CGT is only applicable when your profit reaches certain thresholds.
The tricky situation comes when you’ve bought a (relatively expensive) item, and you should be declaring the CGT. However, do you value those Bitcoins as you bought them for £100 each, or do you value them at halfway through the year when the value is triple, or quadruple that amount? Depending on how one declares acquisition of Bitcoin, and at what value, will affect the CGT that is applicable.
And here we can highlight the beauty of the Blockchain. If ever a government tax office requires proof of purchase, the date and time can easily be shown by the individual in question, and the relevant tax applied to the letter. However, proving the value at which that individual purchased the Bitcoin would depend upon where and how they were purchased.
If an individual wanted to show such information, the pseudonymous nature of Bitcoin puts that power into the hand of the user.
Miners and mining have been given a “liberum transitis” for all intents and purposes. The earnings from mining Bitcoin (or any other crypto-currency) is VAT exempt, “because there is an insufficient link between any services provided and any consideration received.”
The DAC entity otherwise known as The (Bitcoin) Protocol is not a recognized entity at this time. Delving through UK statutes and regulations (The Financial Services and Markets Act 2000 (Regulated Activities) 2001) and FCA Guidelines we can surmise that this is due to the decentralised nature of Bitcoin and similar crypto-currencies.
The following describes transaction fees.
2. 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 instruments.
So the earnings from the protocol (at the time of this article, 25 Bitcoins per every 10 minutes) are not taxable, and the transaction fees included into the mining rewards are also exempt from VAT. But it might be fair to say, that HMRC simply has no idea how such fees would be taxable, probably because it is not possible to tax them.
How do you tax something that requires participation agreement to being taxed? The P2P nature of Bitcoin and its Opensource quality means that any invasive ‘tax software’ would be shunned by those who did not willingly want to pay the tax.
3. 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.
Anyone using an exchange to change currencies from Sterling to Euros, or any other foreign currency will not be charged VAT. Does this signify the end of Thomas Cook and similar exchanges? If you can exchange your Sterling into Crytpo and then into Dollars or another fiat currency, at a much lower exchange rate than the standards foreign currency exchanges, then what does the future hold for Thomas Cook style businesses and the future of (fiat) currency traders when they discover this market en masse?
And concerning any additional costs incurred,
4. 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.
Any individual sellers, brokers and vendors (who are selling Bitcoins from their own personal stock, having mined, earned or bought the coins) that charge any extra charges relevant to their transaction will be exempt from VAT. Additional charges such as travel expenses, extra fees, or unusual costs, that are relevant to any transaction in Bitcoin, are exempt from VAT.
It should be noted that Exchanges operating within the UK are still liable to pay VAT on the services they provide, this being the commission fee, and that all business in this emerging new Crypto financial sector should be aware of the last words,
The tax treatments outlined in this brief are for tax purposes only. They in no way reflect on the treatment of cryptocurrencies for regulatory or other purposes.
Given the evolutionary nature of these cryptocurrencies, HMRC will issue further guidance as appropriate.
What is next for the UK scene, how useful will this be with the anti-bitcoin banking blockade still in full action? Has the UK taken a very pro bitcoin stance, or is the case really that Bitcoin could not be taxed even if they tried?
I for one see it as a positive outlook when compared to other countries such as China and Russia; the options are still here for a beautiful partnership between the current financial sector to bridge into the new and inevitable crypto world. Many businesses are waiting for this moment; it will come, sooner rather than later.
Disclaimer: I believe in tax, but I prefer a willing system, not a coercive one – and especially to be able to choose what your tax money goes towards.
