HMRC reviewing tax treatment of Bitcoin and other 'virtual' currencies, reports say

Out-Law News | 22 Jan 2014 | 3:19 pm | 2 min. read

UK tax authorities are considering whether 'virtual' currencies such as Bitcoin should be reclassified for tax purposes.

Options being examined by HM Revenue and Customs (HMRC) include treating Bitcoin as an asset or as private money, rather than as a voucher as it does currently, according to a report in the Daily Telegraph. It is also considering whether the currency should fall within the existing VAT exemption for currency transactions, which only applies to those currencies that are legal tender, the report said.

"We have held constructive meetings with stakeholders, but this is a complex issue, and we will continue to listen to arguments for alternative VAT treatments under existing VAT law," an HMRC spokesman told the paper.

Bitcoin is a digital asset with a monetary value but which is currently not recognised as an official currency anywhere in the world. Some retailers accept payment by Bitcoin for goods and services but most traders, especially in the EU, have not yet put systems in place to accept Bitcoins in transactions.

A recent report by Bank of America Merrill Lynch in the US said that Bitcoin could potentially "become a major means of payment for e-commerce", but said that the "high volatility" of its value was "hindering its general acceptance as a means of payments for online commerce". Virtual currencies are not currently regulated anywhere in the EU, and national governments have expressed concerns that they could be used for tax evasion and money laundering, according to the Telegraph.

Germany has already classified Bitcoin as private money, which means that VAT on transactions is only charged on the commission charged by trading exchanges. However, VAT and indirect taxes expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that Bitcoin was unlikely to fall within the definition of 'legal tender' for the purposes of the exemption, which is governed by VAT laws at the EU level.

"This exemption is limited to 'currency, bank notes and coins used as legal tender'," he said. "Bitcoin is unlikely to meet the strict legal tests for such a definition in most jurisdictions and functionally it is very different from most forms of legal tender, not being backed by the faith or credit of a sovereign government. In contrast to most forms of legal tender, it appears to be very rarely used as a means of settling debts in normal commercial transactions."

"Treatment across the EU varies, including treating it as some form of commodity or as a voucher. The latter in particular seems especially inappropriate as the uses of Bitcoin are manifold and not limited to exchange for specific goods or services. The UK's scope to deal with the question of liability on a unilateral basis is likely to be limited and the best solution would be found in agreement to modify the exemptions available under the Directive," he said.

The Telegraph also highlighted potential issues surrounding the treatment of Bitcoin for the purposes of calculating capital gains tax (CGT) liability. Corporate tax expert Heather Self of Pinsent Masons pointed out that the fact that virtual currencies could not be seen or touched did not take them "outside the tax net".

"CGT applies to intangible as well as tangible assets," she said. "Bitcoin is unregulated and extremely volatile, so large profits and losses can easily arise. It is likely that these will be treated as capital gains rather than income - so gains will be taxable, but losses may not be much use."

"Anyone considering accepting Bitcoin in a transaction needs to be very aware of potential money laundering issues, and to follow normal due diligence processes carefully. And if you've got Bitcoin, make sure you don't lose your 'wallet' – as one individual did when he scrapped a hard drive containing a significant sum," she said.