Written by Kady Potter
Posted on 22/01/2014

HMRC signals an intention to reclassify virtual currency

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The taxman could be about to define alternative currencies such as Bitcoin as ‘private money’ or an asset, rather than as a voucher, and to change the way it’s taxed. Current standard guidance sees Bitcoin transactions of higher values qualify for 20 per cent VAT, and a reclassification could force newly-created exchanges to relocate.

Not all countries have taken the same approach – while Germany and Singapore have accepted the currency as a form of private money, the government in Norway has ruled that it doesn’t qualify as ‘real’. Taking the currency ‘under its wing’ in this way could create a competitive market advantage over less enthusiastic territories such as the USA and China.

A surge in demand for the online currency in the UK has prompted the move by HM Revenue & Customs (HMRC), as the suspicion of money laundering and fraud grows. While it is true that speculators, investors and individuals have tried to use virtual money to get around traditional currency restrictions, the rise in Bitcoin’s value has also been boosted by the increasing willingness of companies to accept it as a method of payment.

Changes in the legislation surrounding all virtual transactions of this type could come into effect as early as February. Retailers and other online businesses that have started to accept Bitcoin payments are naturally concerned that a ‘double tax’ on their transactions is impacting the bottom line – this is due to its current ‘voucher’ classification. VAT is levied on both the purchase of the voucher itself and on anything bought using the voucher’s value.

The 20 per cent VAT rate is charged to businesses with more than £79,000 in annual revenue – an achievement that many SMEs are proud to claim. However, the added taxation on Bitcoin could mean that low-margin sales above that threshold contain no profits. If HMRC opts to classify the currency as private or an asset, the difference in value between the purchase and sale prices in a transaction could become eligible for capital gains tax, effectively negating that issue.

The official line is that further meetings with the UK Bitcoin community are needed before any changes to regulations take place. However, with a February date for implementation already mooted, new rules are definitely on the horizon.