Bitcoin, known now as a ‘cryptocurrency’, is seen as the world’s first decentralised digital currency. Cryptocurrencies have a unique identity and HMRC states that they cannot therefore be directly compared to any other form of investment activity or payment mechanism. Determining their legal and regulatory status is ongoing.
HMRC understands that Bitcoin operates via a peer to peer network, independent of any central authority or bank. All functions such as issue, transaction processing and verification are managed collectively by this network. 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 by a ‘Bitcoin Miner’. Other activities include the buying and selling of Bitcoin, being a ‘Bitcoin Trader’ and providing exchange facilities and services for parties to trade Bitcoin with recognised currencies – ‘Bitcoin Exchanging’ or ‘Processing’. These activities are currently not subject to VAT, but VAT is due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrency. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.
As with any other activity, whether the treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies will be subject to Corporation Tax, Income Tax or Capital Gains Tax depends on the activities and the parties involved. 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 subject to relief. 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.
- Corporation Tax: the profits or losses on exchange movements between currencies are taxable. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under normal Corporation Tax rules.
- Income Tax: the profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal income tax rules.
- Chargeable gains – Corporation Tax and Capital Gains Tax: if a profit or loss on a currency contract, including on Bitcoin or other cryptocurrencies, is not within trading profits or otherwise within the loan relationship rules, normal taxation rules as a chargeable gain or allowable as a loss for Corporation Tax or Capital Gains Tax purposes will apply.
