The FT has a headline this morning that says:
Japan considers tax on Bitcoin transactions as part of crackdown
There is one good reason for Japan wanting to do this: it has come to the apparent conclusion that Bitcoin is a commodity used for speculative purposes and not primarily as a currency just as the UK has come to the reverse (incorrect, I think) conclusion.
Japan also wants to impose a tax after the collapse of two Bitcoin exchanges within days of each other leading to the loss of significant numbers of the supposedly always traceable currency, giving a lie to its supposed transparent quality for crime-beating purposes and to its merit as a regulation free zone. Tax, it is thought by Japan, would help impose that regulation.
It looks like HMRC made the wrong decision at the wrong time. There's always time to reverse it.
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“It looks like HMRC made the wrong decision at the wrong time.”
That’s not what HMRC said. I quote:
“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.”
Which says nothing about mining
“Which says nothing about mining”.
But HMRC say:
“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”
Presumably that is because income from mining is included in “income reveived…in connection with, activities involving Bitcoin”, so there is no need to spell out the treatment of mining as it falls within general principles of trading income. You have completely failed to demonstrate your belief that HMRC would not regard bitcoin mining as a trading activity chargeable to income tax or corporation tax as the case may be.
So your headline in this blog “..the UK says it won’t” (i.e., tax bitcoins) is wholly misleading, and I suspect you know it.
Have you tried writing headlines?
Why not read the argument?
And as for needing to spell out – it is an unfortunate and regrettable fact that if something is not spelled out to the UK tax profession then they abuse it.
My concern is very well placed and I’m still utterly bemused by all those who seek to dismiss it when it is so obvious that further development in this area is required
Richard, the Japanese and the UK approaches are pretty much the same here. VAT (or sales tax) on purchases and sales denominated in Bitcoin, but not on purchases or sales of Bitcoin itself (just as with Yen, £, $ or €).
Profits from mining taxed the same as profits from any other activity. There’s no difference between the approaches.
If you can reconcile those points you clearly do believe black is white
So far as I can tell the two approaches are the same. I’ve only seen commentary on the Japanese position rather than an equivalent of the HMRC announcement, but they both seem to cover the same ground, and in the same way. I’m quite happy that they’ll both catch all the economic benefits of using bitcoin.
VAT: HMRC say that paying for supplies with bitcoins is taxable in the same way as any other consideration, so no problems there. Japan seems to have said the same (“Purchases made in bitcoins will be subject to Japan’s consumption tax”).
Bitcoin mining is not taxable per se in the UK, but if you then spend the bitcoins you have income to bring into a normal income tax (or CT) computation. Going back to your previous post: the surplus on creating bitcoins will be taxable as trading income if you have a trade of bitcoin production, and I’d have thought that undertaking an activity with the express intention of creating a fungible asset to be sold for value greater than the cost of production is clearly trading.
Interestingly HMRC have said that exchange gains will be taxable, following normal loan relationships rules, which could make life interesting for companies holding bitcoins given their volatility – there is scope for dry tax charges or windfall losses, depending on the year end exchange rate. They also seem to be confirming that bitcoins will be treated as chargeable assets for CGT if they’re not trading, so you rather sensibly get caught either way.
Again, the Japanese rules cover the taxation of income from trading in or with bitcoins. I can’t see anything about unrealised exchange gains, or CGT, but nothing to suggest they won’t be caught.
The one area of HMRC’s guidance I’m a little unsure of is treating services relating to bitcoins as VAT-exempt financial services. I’m not sure they feel close enough to normal finance for that; but then financial sector VAT is a specialist area I’m not too familiar with, and it should limit VAT recovery in this area so seems calculated to increase the tax take rather than allowing loopholes.
So all in all I rather like their approach. I particularly like the repeated mentions of “in the normal way” and “no special rules”. Simple, straightforward, familiar, robust – I like tax systems like that.
What is it about the Japanese tax position that makes it superior to the UK one, in your opinion?
Japan is not proposing to treat this as a currency
The UK is
I still stand by my concern that the HMRC statement does not address the issue of Bitcoin mining – you are all reading it in, and we know what happens when that is necessary
For UK tax purposes, you convert other currencies into sterling before doing any of the tax work. A foreign currency is just another readily convertible asset. Treating bitcoin as a currency in the UK means that it gets treated as sterling.
I’m not sure how Japan treat foreign currency transactions, but I can’t see that they could do much that would make their regime more robust than the UK one. You may be more familiar with the Japanese system than I am, of course.
I think the very fact that HMRC haven’t addressed the question of mining shows that they don’t think it’s any specific concern: it’s entirely covered by general principles.
You’ll agree that bitcoin mining is a business at least, and it’s hard to see how it could not be a trade unless done on a very small scale (which I understand is now ineffective anyway, given the resources required), so I can’t see how anyone could argue out of being taxed on the value of the bitcoins they mine. Except in the trivial sense of making no profit after deducting the cost of the mining, of course, but if someone is making a loss on the activity I’m not sure why one should expect an income tax charge.
I suspect there will be those who say bitcoin mining is not a business
How many people have been in the business of creating crypto currency
I remain baffled why pointing out a deficiency in a guidance note is so unacceptable
How many people have been involved in producing ice cream for dogs? Not many, and the first was very recent, but it didn’t need a particular guidance note from HMRC on how it should be taxed 🙂
Guidance notes are for areas that are unclear. Producing and selling a valuable asset is about as clear as it gets, from a direct tax point of view; VAT is always a bit odd though, so guidance on that is useful.
Andrew
Being fatuous does not help your case
If you can’t differentiate these situations you worry me
Richard
I’m not being fatuous at all, it’s just the example of a new product that sprang to mind. Y
our point was that clarification is needed in new situations. I agree, but only if the new situation is such that the position is unclear. You’ll agree that dog ice-cream isn’t a situation that needs clarification, and I don’t think bitcoin is either.
Had anyone asked me last week what the tax position would be I’d have come up with HMRC’s answer on the direct tax side, and had no doubt about it. On the VAT side I’d not be so sure, and so the VAT clarification is helpful; whereas the direct tax comments are reassuring confirmations but no more than that.
We’ll have to differ again
But I am safe in knowing the situation I refer to is unique and yours has thousands of precedents
I hope you understand the difference
The difference is quite clear, yes: I can see how precedent applies to both situations, based on general principles; you can’t, and require guidance from HMRC before you can form a view.
It’s all over the FT this morning that the Japanese think Bitcoin a commodity and the Uk a currency
And the UK has never taxed currency creation
The HMRC briefing actually says they are finding their way on this
Even they would wholly disagree with you Andrew or there would be no need for guidance
Please don’t waste my time
They say their VAT view is provisional pending further developments, which is fair enough given that VAT is an EU tax and they aren’t in a position to give the definitive EU line, but they don’t put a similar caveat on the direct tax side: they explicitly say “no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under normal Corporation Tax rules.”
Now if you want to start some special pleading that bitcoin miners should be entitled to a tax exemption, feel free.
This comment has been posted further to point 5 of the comments policy to which attention is drawn.
Richard, perhaps i’m missing something, but could you clarify why you think Bitcoin “mining” is different from any other business activity?
The usual rules on taxation of trading profits are quite neutral as to what it is that’s being traded, and whether that thing is being created, destroyed, or passed from one person to another.
In other words, I’m not sure it’s possible in principle to have a business which makes money from repeatedly doing X, and the profit of that business not to be taxed. Do you disagree with that basic proposition?
It is creating a currency
That’s not any old business in my opinion
That’s something people just don’t usually do
I’d have thought it well worth a mention
After all this is not a transaction – but that’s what the release seems concerned with
What’s the big problem with asking for clarification?
I thought your view was that it *isn’t* creating a currency – that’s why you don’t like the HMRC view that it is one?
But they say it us a currency so the charge on creating it has to be considered
And was not
from a UK tax perspective there’s nothing very special about currency unless it’s Sterling. I’d agree with Andrew, and don’t see the uncertainty that needs clarification.
Bit unfair of you to say this is a deficiency in the guidance note, given it was published to deal with a very real uncertainty regarding VAT. Presumably if HMRC become aware that people think there’s an uncertainty regarding taxation of the profits of “miners” they will release a further clarification.
This is a pity! I heard a lot of good things about the apparent benefits of bitcoin. One of them in particular was its apparent traceability and ease of fraud protection, which appears to have been exaggerated.
It is supposed to be like gold, valuable because of its scarcity and that transaction costs were very low.
I am still in two minds about this, but it is beginning to look as if the currency’s bad side is being played down by its proponents!
“But they say it us a currency so the charge on creating it has to be considered
And was not”
Printing luncheon vouchers is the creation of a currency. And I’m absolutely certain that the profits from doing so were taxed just the same as the profits from any other business activity. Why would HMRC need to state, specifically, something that’s already entirely settled practice?
This comment has been posted further to point 5 of the comments policy to which attention is drawn.
The commentary on HMRC’s brief is weak in relation to the income tax, CGT and CT treatment of Bitcoin. It highlights the speculative activities as gambling in order to head off loss claims.
“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 relievable.. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.”
However, it fails to indicate what activities may be classed as trading and it fails to spell out whether or not the CGT exemption in relation to foreign bank accounts would apply.
The Japanese appear to have made the sensible step in treating Bitcoin as a commodity, whether it has sufficient store of value as well as being a medium of exchange is debatable.
Though I would add that currently it appears that Bitcoin’s value is holding up well after the Mt Gox fiasco.
It doesn’t need to spell out what would be classed as trading: this is well-trodden ground familiar to HMRC and tax advisors alike.
I don’t see how the foreign currency bank account exemption could apply: bitcoins aren’t held in bank accounts. Places like Mt Gox aren’t banks, so s252 isn’t applicable.
As noted above, the reason HMRC aren’t saying much about direct tax is that there’s not much to be said: the position is clear from first principles.
Andrew
You’re getting pretty tedious on this point, to be polite
The position is clearly not clear
If it was no guidance would have been needed on any tax and nor would HMRC say it will need to revisit the issue
Quite simply, you are wrong
Richard
Confirmation of HMRC’s views on the VAT side is useful. You will notice that this was issued as a VAT brief, so VAT is clearly what HMRC were interested in.
Having decided that VAT warranted some comment, they seem to have then decided to mention direct taxes as well for completeness. That’s simply good practice: it’s not worth issuing a Brief to say that the situation is as you’d expect, but if you’re issuing one on a related matter then you might as well round it out by confirming that there is nothing unusual.
When they then go on to say “Given the evolutionary nature of these cryptocurrencies, HMRC will issue further guidance as appropriate”, that’s just boiler plate to make sure people don’t try and hold them to this should the situation change.
The VAT position is clear now, because HMRC have commented on it. The direct tax position always was clear, to anyone with a grasp of first principles.
I really don’t see what you’re worried about. Are you really suggesting that an activity carried on with a view to profit, in a business-like way that is common across the industry, using significant amounts of plant, regularly and frequently, could be regarded as anything other than trading?
No one has created cryptocurrency before
Of course direct tax risk exists
Your pretence that this is run of the mill is completely baffling, at best
I think you’re over-thinking things. There are lots of new things in the world, but the way UK tax law is drawn, with wide-reaching principles, means that it is easy to slot them into the framework.
Cryptocurrencies may be new and exciting from an economic point of view, or an IT perspective, or as a social phenomenon; but from a tax point of view a person dealing in them is just another business. Novelty in one area does not mean novelty in all.