Bitcoin Tax Issues in the UK
Given the nascent nature of Bitcoin and the evolution of Bitcoin adoption, governments are at differing stages of understanding, particularly when it comes to incorporating Bitcoin into the tax frameworks which already exist. This article aims to clarify the current status of the UK government with regards to taxation of Bitcoin.
In March 2014, HM Revenue & Customs issued a policy paper entitled Bitcoin and other cryptocurrencies which outlined the most comprehensive tax treatment of Bitcoin published by the UK government to date. The paper focussed on the four key areas of taxation: Value Added Tax (VAT), Corporation Tax (CT), Income Tax (IT) and Capital Gains Tax (CGT). A brief summary as follows:
Value Added Tax (VAT): VAT is a government tax levied on the value added to a product or service throughout the supply chain to the end consumer. If a manufacturer purchases materials, he can claim the VAT charged on the purchase back from the government. But when he sells his product, presumably for some gain compared to the original cost of materials, he must pay VAT on the sales price. So overall, the manufacturer has reclaimed an amount of VAT on expenditure, but paid a greater amount of VAT on revenue, and therefore his net VAT contribution will be the VAT rate times the added value that manufacturer has contributed to the supply process. The guidance contained within the policy paper is very clear for the case of Bitcoin: VAT is not claimable or chargeable on sales or purchases of Bitcoin. VAT is not claimable or chargeable on the mining of Bitcoin. VAT is, however, chargeable in the normal fashion on products or services which are sold in exchange for Bitcoin. So in this respect, the VAT treatment of Bitcoin is very much the same as if it were a currency.
Corporate Tax (CT): Corporate Tax rules are the same for Bitcoin as they would be for any other currency, with profits or losses on exchange movements between currencies taxable. Any movement in exchange between the company’s functional currency and Bitcoin would therefore result in a tax benefit/liability. Interestingly, this means that if a company’s functional currency is Bitcoin, there would be no taxation on currency movement. Tax on corporate profit would be unchanged.
Income Tax (IT): As with CT, IT rules remain unchanged, whether paid in Bitcoin or any other currency. Specifically, this would therefore require an individual to include any income received in Bitcoins on their tax return.
Capital Gains Tax (CGT): A tax typically chargeable on the profit made when selling assets. Individuals benefit from a CGT threshold, which allow for gains of £11,100 (for the tax year 2015/2016) before any CGT becomes payable. Bitcoin is subject to Capital Gains Tax as per the normal rules.
The above guidance is reasonably clear and straightforward, and relatively encouraging for those transacting or investing in Bitcoin (the exemption of VAT on Bitcoin mining activity, for example, allows such mining to take place unhindered in the UK). However it leaves an elephant in the room of what exchange rate to use when calculating any tax benefit/liability. The rules are quite specific surrounding other currencies, with conversion to sterling allowed at the rate used by the accounts of the company, only queried if such rate diverges markedly from rates obtained from reputable sources. What is a reputable source for the sterling to Bitcoin conversion rate? HM Revenue & Customs offer no guidance as of yet. As any accountant would tell you, however, best keep detailed records with as much evidential proof as possible should you or your firm be subject to a tax inspection…