Virtual bitcoin currency ensures privacy, but is it worth the investment? - Spear's Magazine

Virtual bitcoin currency ensures privacy, but is it worth the investment?

Over the last few months bitcoins have received a significant amount of media coverage as an internet currency that can be used to buy anything from a pizza to a hitman. But what are the tax implications? A bitcoin is a virtual currency and was first introduced in 2009. It allows internet transactions to take place on a largely but not completely anonymous basis (hence its attractiveness to users of the dark web).

Transactions are direct between the two users with no banks involved. As the transactions are virtual on a peer-to-peer basis charges are extremely low. There is also a limited circulation of bitcoins and it is therefore, in theory, not prone to inflation or central government interference.

As demand for bitcoins rises each bitcoin becomes subdivided into more and more sub parts. However the cost of a pizza in bitcoins will always remain broadly comparable to the cost in any other currency or people would not use it. The primary attraction for users of bitcoins appears to be anonymity and freedom from central government interference. Oh yes, and the value is going up. On Wednesday 27 November 2013 a bitcoin exceeded $1,000 in value on Japan’s MtGox exchange for the first time. That is almost a five-fold increase within the month.

So lets take a simple tax example. Joe purchases five bitcoins from a bitcoin exchange for £5. He holds on to them for a couple of years during which time they appreciate significantly in value and he sells them for £100 each. What are the tax implications?

Well the first question is whether Joe is trading in bitcoins or not. If he is, then the excess of the proceeds over the cost (£495) will be liable to income tax as with any other trade. However lets assume that the bitcoins were held as an investment, what happens then?.

Not exempt

In such circumstances we need to consider the nature of a bitcoin. Is it a foreign currency? Is it incorporeal? Is it a chattel (as one website suggests)? We can probably deal with the last issue first. Bitcoins being virtual are not chattels as chattels by their very nature need to be tangible. Therefore anyone hoping that the sale of a bitcoin would be exempt from capital gains tax under the chattels’ exemption is going to be disappointed.

Moving on, both foreign currency and incorporeal assets are both taxable under the tax legislation (s249 TCGA 1992 for anyone who is interested) so whichever view you take the sale will still be taxable as a capital gain. Therefore after your annual capital gains tax exemption any gain will be taxable at either 18 per cent, 28 per cent or a mix of the two. Some readers may also be involved in what is known as bitcoin mining. This is difficult to explain in simple terms but involves people using their
computers to validate bitcoin transactions in return for bitcoins. This is often done in pools of people due to the complexity of the validation process.

HMRC have made no clear statement on this area, however it would appear, using first principles, that a trade is clearly being carried out and that any profits based on the bitcoin value on receipt should be reported to HM Revenue & Customs. Any subsequent gain or loss would be liable to capital gains tax or be available as a loss carried forward.

Therefore those of you interested in getting on the bitcoin bandwagon, bear in mind that it is not only very volatile and prone to disruption but also taxable so tread carefully. As with any currency the value is based on the trust that people have in it. If people have a crisis in confidence in the bitcoin it could devalue very quickly.

Geraint Jones is a private client partner at London accountancy firm Reeves (www.reeves.co)



 

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