HMRC have issued new guidance on the taxation of Bitcoins today.
The essence of this guidance is that trading in bit coins is now not subject to VAT, whilst trading recorded in bit coins is now definitely subject to taxation in the same way as any other income.
However, the key differential factor with regard to bit coins is that this is a ' cryptocurrency' about which HM RC say, in a release laden with gobbledygook:
Purpose of this Brief
This brief sets out HM Revenue & Customs (HMRC) position on the tax treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies, specifically for Value Added Tax (VAT), Corporation Tax (CT), Income Tax (IT) and Capital Gains Tax (CGT).
Readership
Anyone making charges or otherwise receiving income, in whatever form, from activities involving Bitcoin (or other cryptocurrencies), including:
- Bitcoin miners
- Bitcoin traders
- Bitcoin exchanges
- Bitcoin payment processers
- Other Bitcoin service providers
Background
Bitcoin is seen as the world's first decentralised digital currency, otherwise known as a 'cryptocurrency'. The advent of cryptocurrencies such as Bitcoin is a new and evolving area and determining their legal and regulatory status is ongoing. Cryptocurrencies have a unique identity and cannot therefore be directly compared to any other form of investment activity or payment mechanism.
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. Participants in this activity are known as ‘miners'.
As well as mining, activities include the buying and selling of Bitcoin and providing exchange facilities for parties to trade Bitcoin with recognised currencies. Bitcoin may be held as an investment or used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.
The unique characteristic of this currency is, therefore, that a user can create it. This is the supposed adapter at it called 'mining'. This is and activity giving rise to profit that is equivalent to the age-old right of governments called seignorage: that is, the surplus that arises when a unit of currency is created.
There is no hint in the release as to how that surplus is to be taxed. As a result it is clear that HMRC have missed the biggest potential challenge from Bitcoins, which is that they claim a right of government, attributable to a state, which is to make a surplus from the creation of the medium of exchange. In the process they duck the fundamental destabilising nature of this activity which is intended to create a currency that is beyond the reach of taxation. As an exercise in opening the barn door and letting the horses bolt, this is a particularly good example.
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Bitcoin mining is no different to any other capital-intensive IT business. An individual or, more likely nowadays, a company buys dedicated mining equipment and sets it to work. The bitcoin that are mined are sold on exchanges or kept, speculatively. This is not enormously profitable. In fact, for all but the newest generation of mining equipment, it is enormously unprofitable. There is an idea that bitcoin are mined for ‘free’ but the costs of power, equipment are high, the depreciation of equipment is rapid and the uncertainty is huge. There just isn’t going to be much, if anything, to tax on the mining side.
I’m unsure why you think that bitcoin was designed to put currency ‘beyond taxation’ – one of the characteristics of the protocol’s open ledger is that every transaction is available for public perusal. There are other cryptocurrencies with total anonymity baked-in but bitcoin is actually a very poor tool for money laundering, drug purchasing and tax avoidance.
I’d love to say I believe you
I am having great difficulty doing so
Somewhat has created a lot of ‘wealth’ here and it looks untaxed
With every Bitcoin mined the next Bitcoin is more difficult to mine. That difficulty accumulates, accelerates and the amount of computing power eventually becomes astronomical. There is also a limit set upon the amount of Bitcoins that can be mined. It’s all set up to be analogous to gold – an initial gold rush, diminishing returns and then finally all reserves exhausted and all gold in circulation. My understanding is that the ‘reserves’ of Bitcoins won’t be exhausted for some time but that’s largely due to the exponentially increasing difficulty of mining them.
So, while this mining issue may be a problem I don’t think it’s the principle one and, indeed, it’s a problem that will decline over time as mining becomes less and less profitable (for Bitcoin at least, not necessarily for imitator currencies). The main problem would be the ‘crypto’ aspect, which, as I understand it, has been somewhat overstated. A pseudonymous currency is not the same as an anonymous one, although the link between a pseudonym and ‘real world’ identity is something rather indeterminate and flexible.
It seems to me, overall, that the technology is not fundamentally hostile to traceability or, therefore, to taxation, etc. However, the enthusiasm for the technology is clearly due to the fact that it has this uber-libertarian potential. I see no cause for evangelism or puritanism. The substance of the technology isn’t as absolutely deterritorialised as the hype would suggest; and it’s this hype that accounts for the extreme reactions for and against.
Clearly the status quo leaves open many nefarious possibilities for various kinds of crime (and Bitcoin is doubtless playing such a role as we speak) but I don’t think it’s quite the evil that it’s being made out to be. Not in its present iteration, anyway…
The cost of creating a bitcoin should be offset against the value of the finished product when it is sold or used and its value can be determined. If HMRC think the creation of bitcoins is a trade then there will be a tax on any profit, but I assume there will also be a loss for tax purposes if the individual can demonstrate that the cost of mining exceeded the value of the finished product.
They do not say there is any such charge
That was my point
They ignore it
Bitcoin is no different to any other money
All money is a confidence trick. Banks just magic it out of thin air
Bitcoin is probably better all things considered
No it is not unless you’re seeking to assist criminality
As I understand it, it is theoretically more traceable than sterling
If that is really the case that is less helpful to criminality than sterling
If being a crucial word that you too can qualify your statement with, why not back Bitcoin?
If it was traceable how did the biggest broker lose so many?
The claim is not credible
Firstly, I am obviously qualifying my position
I’m happy to say now that if Bitcoins are as traceable in practice as they are in theory then they are less helpful to crime than sterling
If they’re not as traceable in practice, then that means that my statements aren’t true. That’s the generally accepted meaning of the word ‘if’
Secondly, I guess we will see quite soon whether Bitcoins are as traceable in practice as they are in theory
You mustn’t be inclined to disagree with everything a libertarian likes. I am sure you both like ice cream
If bitcoins were traceable they could not be stolen
There are new reports of theft from a broker today
I rest my case
I think you are making a premature judgement
Of course something that is traceable can be stolen. The point about being traceable is that it can be traced and then returned to its rightful owner
So the question of traceability will now be tested given that Bitcoins have been stolen
If they get returned, the traceability works. If they don’t, it doesn’t. It’s all quite scientific when you think about it
That’s all I’m saying. You might be right ultimately, but right now you could equally be wrong. Keep an open mind, life isn’t always a binary position of black and white
Reporting suggests that brokers do not think they are traceable
If they don’t I take it as hard evidence they have no confidence in the tracing
Traceability and traced are not the same thing
You still don’t address the possibility that they will be traced – indicating a degree practical traceability
You are correct. Traced and traceability are different things but something that is traced is obviously traceable. Something that is traceable may not be traced
So your distinction suggests that even if not traced, they might be traceable. Which I agree with
So even if not traced we don’t know if the Bitcoins are traceable
We can only prove that they are traceable in this instance. We cannot prove that they are not traceable
I am not sure I see the difference between mining bit coins and making bottles of wine. Both could be used to pay for a service, although one may be slightly more liquid than the other.
A profit only arises when you use the item you have created in satisfaction of a debt, in which case you are able to determine its value.
Bitcoins are ‘crpto’ currency
Maybe you need to think about both words
“Someone has crated a lot of wealth here”. Try telling that to MtGox! But in any case, surely the “big issues” are the domain of Government. HMRC is about collection, not policy. In that sense their guidance is entirely correct, even if the practicalities are somewhat challenging
A lot of wealth may have been stolen there
To be stolen it has to be created first
And HMRC is about policy; let’s not be silly
I read the HMRC guidance as clearly saying that individuals making a profit from Bitcoin (whether as miners, brokers or individual investors) have to declare it and pay income tax on it (if traders) and capital gains tax (if not). I struggle to see how there could be any other result. The controversy was whether bitcoin brokers had to pay VAT (i.e. so if you exchanged bitcoins for Sterling you would be charged 20% VAT on top). This always looked odd, given it’s a pure financial transaction, and HMRC have confirmed this is not the case (I would expect after having taken legal advice). They don’t focus on the direct tax position because it’s never been in doubt.
Some may think Bitcoin is a great medium for money laundering and/or tax evasion, but it’s technically much more traceable than cash or offshore accounts.
There is no statement on the profit of mining
There could be and I am not the only person who could not see it
There is good reason for that: HMRC have never had to tax the creator of currency before. They need to say how they will do it and have not
And ‘technically’ is a deeply ambiguous word
“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”
Mining bitcoins is no different from any other activity in intangible property and/or barter, both of which have always been taxable. Some of the libertarian advocates of Bitcoin think it’s different and new, hence can’t be taxed – they are wrong. Not sure why you’re making the same mistake. You have a funny habit of making very definitive pronouncements in areas where you clearly don’t have much expertise.
We have never seen people make profit from creating currency in this way before.
I am well aware how people seek to wriggle out of liability to tax – something on which I do know quite a lot, which may have been on the GAAR advisory committee
There is no guidance here on whether or not mining Bitcoins is transaction, or not and as such there is uncertainty
I think it entirely appropriate to draw attention to that lack of direction which is needed
I think your comments quite inappropriate and for the record, wrong because I think it is you who has missed the point
“HMRC have never had to tax the creator of currency before.”
It’s not a problem it’s likely to have in the future, either.
Maybe you’re being mislead by the label “crypto-currency” but BitCoin is not a currency. Currencies are the legal tender of the States that issue them. And, as yet, HMRC hasn’t begun claiming the right to tax foreign states on their money printing.
HMRC are taxing BitCoin transactions & seigniorage profit in exactly the same way as they’ve been on Luncheon Vouchers for the past 5 decades. To which, BitCoin are a close analogy.
I really don’t think that’s true
It would be nice and simple if it were, but I do not see the analogy, at all
Regarding your comment as to how the biggest broker Mt Gox lost the Bitcoins, FTAlphaville speculates that it was simply appropriation as would be found at any big exchange in history which was unregulated. FTAV’s view is that apart from the electronic ledger it is pretty much like any other currency.
http://ftalphaville.ft.com/2014/03/03/1787992/magic-the-undercapitalised-gathering-online/
Taxation, while one aspect of the Bitcoin story is a very narrow lens to view it. After all, there is every opportunity for the State adopting a similar model of electronic currency (with strong arguments to be made for effecting transfers to citizens directly and bypassing the banking system to pay bonuses). Also Bitcoin as a transfer mechanism is innovative and threatens to disrupt the payments industry (making it cheaper and more efficient).
There is seigniorage accruing to miners but knee jerk taxation reaction is premature. A similar proposition exists with Safricom which has revolutionised the payments system in Kenya and the developing world allowing the unbanked to participate in the payments system. It accumulates seigniorage also, but is untaxed.
http://blogs.ft.com/gavyndavies/2014/01/19/bitcoin-miracle-or-madness/
http://ftalphaville.ft.com/2013/12/17/1724982/the-repo-market-as-a-form-of-free-banking/
http://ftalphaville.ft.com/2012/07/20/1089571/more-on-m-pesa-and-e-money/
I am not sure why you think there is anything special about currency – a trader is subject to tax on his or her profits whether it be trading in Swiss Francs, conch shells, babysitting tokens, virtual items in a computer game or Bitcoins (although Bitcoins are more traceable than those other examples). This is not just my view – a few minutes with Google will show you plenty of advisers saying the same thing, and just a few fringe libertarians saying that there is something magic about Bitcoins that takes them out of tax.
Of course now those same fringe libertarians will be able to point to this blog as authority that there is doubt whether Bitcoin miners are taxed in the UK. Good work!
I am sorry, you completely miss the point
Trading in a currency is not the same as creating one
Do you not understand that?
Creating intangible property is trading no matter what the property is, and the profits of the trade are taxable. It is debateable whether Bitcoin is a currency, but not very interesting and not at all relevant to the UK tax treatment. Some points of detail will turn on whether Bitcoin is classified as an intangible, a financial instrument or something else, but the basic principle will not.
If you really think it’s possible to make a profit and not be taxed on it then you have a very unusual view of UK tax (and I hope you never advised clients on this basis).
You still ignore my point: it dies not say so and without precedent to prove it and without statement of intent to do so there will be those who dispute your view
That is why the statement was missing an obvious element and trying to read in what as not there would not have been necessary if the statement had directly dealt with the issue, which is what I said was needed
I am really not sure what your problem with me saying that is
As for your claim that creating intangible property is trading…..really? I really think you need to think again about that as it is very obviously untrue.
interesting… so you think someone carrying on a business of creating IP is not trading? If someone creates a new kind of intanglible property one doesn’t need precedent to say that dealing/creating it can constitute a trade.
The statement doesn’t direclty deal with the issue because, until this post, there was nobody who thought there was an issue. You are being led by your ideological dislike of Bitcoin rather than by thinking properly about the analysis. Nobody can possibly understand the entire tax system and one of the hallmarks of a good adviser is knowing where one’s expertise ends and, at that point, researching the point or seeking the counsel of others – you for some reason seem to have an aversion to doing this. I shan’t be commenting again.
You said creating IP is trading
I challenged that
Carrying on a business creating IP is trading
Creating IP does not mean trade is created
Now do you see why direction is needed?
I think you need to heed your own advice
surely the point is that there is no tax due on IP created until it is used to make a profit. Once a profit is made, then tax is due on the profits (whether that be through the company valuing it’s new IP & showing a profit, or by using this IP to sell something).
To take the analogy through to Bitcoins, “mining” Bitcoins creates the IP (at some cost to the miner). The value of these new Bitcoins would then be realised by their sale into another currency, or by the company marking them in it’s books (much like the mark-to-market p&l used by banks in their trading books).
Surely current tax rules cover both of these event adequately already?
If it is not stated that this is the case – and the guidance does not – then the possibility of abuse exists
That is what I was pointing out, and I still think it right to do so