January 31 – Cryptocurrency Tax D-day

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3 Bitcoins in a row

Dr Clare Jones,  Associate Professor in Law, examines tax implications of digital currencies

For those of us that complete a tax return for HM Revenue and Customs, the 31st January comes around very quickly each year. Previously those who have invested in digital currencies may not have considered declaring these investments. However, with the rise in investments in digital currencies during the last year and with some people making trading in cryptocurrencies their full-time job, then the 31st of January should now be relevant.[1] Although earnings via digital currencies within this current tax year 2017-2018 may not be pertinent, the next financial year will surely see a rise in revenue for the Government due to the activities over the last year.[2]

Digital currencies have the reputation of being used to facilitate crime whether it is money laundering or fraud, yet tax evasion is a real and present threat and digital currency investors often ignore or are unaware of the prospect of paying tax on earnings.

In 2014 the Government issued a Brief outlining the tax implications for Bitcoin and other Cryptocurrencies.[3] HM Revenue and Customs states that: “Cryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism”.[4] Having said that, they are not exempt and must comply with EU wide tax VAT rules. Revenue and Customs are quick to point out that guidance given in the briefing does not provide a regulatory stance over cryptocurrencies.  The tax treatment as outlined in the briefing paper is as follows:

·         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;

·         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’;

·         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, and,

·         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.[5]

In terms of Corporation Tax, Inheritance Tax and Capital Gains Tax,  will be judged on a case by case basis and will be dependent on relevant legislation and case law to determine the correct tax liability. Any business that accepts Bitcoins for services or goods, there is no change to revenue or collected or tax paid.

Although cryptocurrencies are proving to be an enigma within the legal and tax industries, it is clear that the UK Government along with other international governments are keen to look at piecing together rules and regulations to bring cryptocurrencies under the umbrella of governance. The 31st of January, may next year, be more of a bug-bear to digital currencies investors than ever before.

[1] BBC News. Bitcoin – the revenue comes calling. 31 January 2018. http://www.bbc.co.uk/news/technology-42872610 accessed 31 January 2018.
[2] Ibid.
[3] HM Government. Revenue and Customs Brief 9 (2014): Bitcoin and other Cryptocurrencies. https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies  Accessed 31 January 2018.
[4] Ibid
[5] Supra n. 3.

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