UK Bows To Pressure, Likely To Reverse Course On Taxation Of Bitcoin: Will The US Be Next?

Jan 17 2014, 4:31pm CST | by

UK Bows To Pressure, Likely To Reverse Course On Taxation Of Bitcoin: Will The US Be Next?

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.

Want more taxgirl goodness? Pick your poison: receive posts by email, follow me on twitter (@taxgirl), hang out with me on Facebook or check out my YouTube channel. If you want to keep an eye on documents I’ve posted, check out my profile on Scribd. And finally, you can subscribe to my podcast on the site or via iTunes (it’s free).

Source: Forbes Business

 
 

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