Bitcoins have exploded in popularity and are currently receiving a huge amount of attention. If you’re using Bitcoins in your business, you may be confused about your tax position. In this short guide we’ll give you the lowdown on Bitcoins and tax.
What is Bitcoin?
Bitcoin is a decentralised, electronic currency. This means it’s not controlled by a central bank, and it doesn’t exist as a physical currency. Despite these subtle differences, it acts in a manner similar to a regular currency: you can exchange your money for Bitcoins, and vice versa, in much the same way you do when travelling overseas. You can exchange Bitcoins by using either an exchange or by trading directly with another individual. Once you’ve purchased your Bitcoins, they’re stored in an electronic wallet, ready for you to spend. Similarly, people can purchase goods and services from you by transferring Bitcoins from their wallet to yours.
You can find out more about Bitcoins here.
For tax purposes, HMRC treat Bitcoins as they do any other currency
HMRC have recently updated their tax guidance in light of the growing popularity of Bitcoin. They’ve taken a very pragmatic approach and Bitcoins are treated in the same way as an other non-sterling currency.
VAT on Bitcoins
Buying and selling Bitcoins, and any commission payable on the exchange, is exempt from VAT. However, regular VAT rules remain when you’re supplying goods and services in return for Bitcoin. In this case, you must calculate and charge VAT on the sterling value of the Bitcoin at the time the transaction takes place. For example (based on the exchange rate when this article was written) if you raise an invoice for 1.3BTC (BTC means Bitcoin), you must calculate VAT on a value of £457.
Corporation tax on Bitcoins
If your company purchases Bitcoins and later uses them to buy goods or services, any increases or falls in the exchange rate will count as a taxable income or a loss. Also, if your company makes a profit or loss from dealing in Bitcoins, it counts as a capital gain – which is subject to corporation tax.
Income tax on Bitcoins
As an individual tax payer, you do not pay income tax on exchange rate profits from personally held Bitcoins: instead they are subject to capital gains tax.
Capital gains tax on Bitcoins
If you personally buy and sell Bitcoins, the gain (or loss) is subject to capital gains tax, and is calculated using regular capital gains calculations. For example, if you purchased 5BTC for £2,285 and later sold them for £3,185, your capital gain is £900. If your total gains, minus losses, exceeds your annual tax-free allowance (currently £11,000) then you must pay capital gains tax on the gain.
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