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Earnings from trading with the virtual currency bitcoin are to be free of VAT, HMRC have announced.
The tax department has set out its position on the treatment of income received from and charges made in connection with activities involving bitcoin and other cryptocurrencies.
Bitcoin operates through a peer-to-peer network, independent of any central authority or bank; transactions are recorded in a shared public database called a block chain.
Earnings from trading with the virtual currency bitcoin are to be free of VAT, HMRC have announced.
The tax department has set out its position on the treatment of income received from and charges made in connection with activities involving bitcoin and other cryptocurrencies.
Bitcoin operates through a peer-to-peer network, independent of any central authority or bank; transactions are recorded in a shared public database called a block chain.
Bitcoin is produced when a new block is attached to the chain – which can be done only when the answer to a cryptographic algorithm is solved. Participants 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 can be held as an investment or used to pay for goods and services.
The Revenue has decided that income received from bitcoin mining activities will generally be outside the scope of VAT.
Income received by miners for other activities – such as 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. Charges 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).
VAT will be due from suppliers of any goods or services sold in exchange for bitcoin. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.
For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply. The profits and losses of a company entering into transactions involving bitcoin would be reflected in accounts and taxable under normal corporation tax rules.
Profits and losses of a non-incorporated business on bitcoin transactions must be recorded in accounts and will be subject to income tax.
Gains and losses incurred on cryptocurrencies are liable for capital gains tax if they accrue to an individual or, for corporation tax on chargeable gains if they accrue to a company.
