Taxing Bitcoin in the UK

Because of Bitcoin skyrocket increase this past year from $17 to over $1,200, you cannot escape hearing about those cryptocurrencies and how they will change world commerce forever. While the Federal Reserve gave tacit approval, stating “virtual currencies like bitcoin have legitimate uses and should not be banned,” and while it's been acknowledged by the Chinese authorities as a valid currency (even though Banks have yet to gain authorisation to use it) there is still a lack of guidance from the tax authorities as to how those new currencies should be treated. There are 2 possibilities on how Bitcoin should be treated for tax purposes: either as an intangible asset or as a foreign currency. If a Bitcoin is considered an asset, profits will be taxed as capital gains, i.e. at either 18% or 28% depending on your tax band. However, if it's considered a foreign currency, then profits will be taxed as income, and therefore as high as 45%.

The problem with saying that it’s a currency is that it is not issued by a government, and traditionally currencies are legal tender issued by governments. In California Bankers Assn v. Shultz, the Supreme Court stated (in a non-tax context): “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.”

The US tax authorities have not voiced their opinion, but both Canadian and Swedish tax authorities are treating Bitcoin as an asset. And the German Finance Ministry initially said that bitcoin is not classified as e-money or a foreign currency but is a financial instrument under German banking rules. Germany on the other hand has been rethinking its position on digital currencies and recognising them as "units of account" recently.

The UK is considering Bitcoin as assets too but in in a way that could jeopardise its development. Indeed, HMRC have managed to classify Bitcoin as 'Single Purpose Vouchers' which means that VAT is due on them. That is a serious showstopper! I suspect it's a matter of time until the UK tax authorities realise that you can't go against the tide, but until then we suggest you proceed with caution.