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As the Internal Revenue Service and Congress remain mostly quiet
on how to treat Bitcoin for tax purposes, tax authorities in the UK are
about “to do an about turn on the taxation of Bitcoin.” The news comes
from Richard Asquith, Head of Tax, TMF Group,
who added that the new rules “will give a lot of clarity” to the
taxation of Bitcoin and virtual currencies in the UK – a far cry from
what we have right now in the US.
Under the proposed new rules, UK tax authorities, known as Her
Majesty’s Revenue and Customs (HMRC), will change its classification of
Bitcoin and other virtual currency from a tradable voucher to private
currency. Those changes closely mirror similar tax guidance issued
recently in Singapore, a move that Asquith pointed out when he alerted
me to the changes.
For British tax and investment purposes, vouchers have a monetary face value.
If you sell vouchers at or below their monetary value, no value added
tax (VAT) is due. Depending, however, on the redemption value, the
transaction is subject to VAT on all or part of the value. When it comes
to Bitcoin, if it’s treated as a face-value voucher to buy goods and
services, it would be subject to full VAT on the value of the Bitcoin
sold. Under this tax treatment, about 20% VAT would be charged each time
Bitcoins were used. That level and scale of taxation was said to be
killing off the Bitcoin market in the UK.
Investors, merchants, consumers and lobbyists alike balked at the old
treatment. For some time, they put pressure on UK tax authorities to
make a change. It appears that HMRC will now reverse positions and treat
Bitcoin as though it is private money. On the trading side, that means
that VAT would be payable on commission charged on exchanges. And while
the details are still not hammered down on the consumer/trader side,
indications are that HMRC would also make Bitcoin subject to the capital
gains tax (CGT) but allow an exemption for those who hold onto them for
more than a year (the equivalent of an extremely, extremely favorable
long term capital gains rate). Other taxes would likely not apply.
You might recall that this is similar to a position adopted last year
by Germany. Only a handful of countries have actually taken a clear
position on the matter, prompting Asquith to comment, “If the UK tax
re-categorisation goes ahead, it will stabilise the domestic Bitcoin
exchange market which had been threatening to move out. It would also
probably start attracting European and even global trade to migrate to
the UK as it will be one of the first countries to have a well thought
through tax regime.”
The US cannot claim a similar position – even as the popularity of Bitcoin increases. Last week, online retailer Overstock
made news when it announced that it would accept Bitcoin as payment. It
is the largest US company to date to tout acceptance of Bitcoin – but
it’s far from the only company trying out the virtual currency. Smaller
retailers are signing on, too.
Jennifer Longson was an early adopter when it came to accepting Bitcoin at her business. Her store, Cups and Cakes Bakery,
with an actual physical presence in San Francisco, has accepted Bitcoin
for payment since October 2012. It’s a easy process, just a click over
to the payment page
where payments are accepted via Bitcoin for your order for the usual
suspects (red velvet, chocolate, and vanilla cupcakes) or whatever
happens to be on the cupcake calendar for the month.
And despite the fact that Longson doesn’t have the retail volume of
an Overstock.com, she says, about the decision to accept Bitcoin, that
there “were lots of up sides with no down sides.” Customer response, she
says, has been very favorable. “We’ve even inspired other businesses to
take the plunge!”
And therein is exactly the problem with the failure of the US to take
a position on taxing virtual currency: as more and more retailers jump
on the Bitcoin bandwagon, it’s likely that we’ll end up with a serious
compliance problem. In contrast, proactive, thoughtful tax policy will
likely give countries like the UK and Singapore a real advantage over
countries without any real guidance.
Asquith and others across the pond seem to believe that the US will
eventually adopt some kind of policy statement on the taxation of
Bitcoin. To stay competitive in a global market, they’ll have to.
Of course, all of these moves to figure out how to treat Bitcoin mean
that we’re doing exactly what Bitcoin didn’t think it wanted in the
first place: we’re labeling it. We’re categorizing it. We’re very nearly
(gasp) regulating it.
As Asquith notes, this puts Bitcoin in the unusual position of moving
“away from its original aspiration to be a global, unregulated
currency.” Without some sort of regulation on the tax side, however,
Bitcoin could find itself the victim of its own success. I guess they’ll
have to figure out how to have their, er, cupcake and eat it, too.
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