Will UK Tax Authority HMRC Reclassify Bitcoin as 'Private Currency'?

A reclassification of bitcoin by the United Kingdom's tax authority would put the nation in line with more liberal bitcoin tax rules initiated by Singapore, a professional services firm has claimed.

Richard Asquith, head of tax at TMF Global, said the UK's tax authority HM Revenue and Customs (HMRC) is most likely to reclassify bitcoin as a 'private currency'. This would significantly reduce the tax liability compared to its current classification as a 'tradable voucher’.

If HMRC classifies bitcoin as private money, then bitcoin holders would not be liable for capital gains tax. Value-added tax is still charged, but only on fees incurred by trading on an exchange, Asquith said.

"The move would ... eliminate the heavy [capital gains] tax uncertainties and leave a reduced VAT liability. This would give the UK bitcoin industry a significant competitive advantage."

Singapore and Germany

According to Asquith, such a reclassification of bitcoin by HMRC would match Singapore's tax authority and measures already adopted in Germany. In addition, it would bring the regulatory treatment of bitcoin closer to that of other 'psuedo-currencies' like gold.

"[Reclassifying bitcoin] means that it would become much more like gold, which is VAT exempt. Gold is treated like money but it's not a currency; it's a pseudo currency."

The Inland Revenue Authority of Singapore (IRAS) outlined its position on the cryptocurrency this month.

Notably, no capital gains tax would be levied (assets that are not property are not liable for capital gains tax in Singapore anyway); income tax would be charged based on fees earned by a company from trading in bitcoin; sales tax is generally charged on an exchange's commission fees.

Additionally, the Singapore position doesn't mention the term 'private money', and it has explicitly stated that bitcoin is not a form of currency.

In Germany, regulatory authorities view bitcoin as 'private money' or a 'unit of account'. Bitcoin transactions are exempt from capital gains tax after a year.

Assets like stocks and bonds are subject to a 25% capital gains tax and a state-dependent church tax. Bitcoin mining in Germany, however, is subject to income tax. Germany authorities haven't clarified whether a full value-added tax liability applies to bitcoin transactions, Asquith noted.

Bitcoin taxed as vouchers

While Germany and Singapore offer relatively liberal approaches to bitcoin taxation, there are more onerous alternatives, according to Asquith.

The current HMRC treatment of bitcoin as a voucher, for example, results in a heavy sales tax burden of 20%., and in some cases, double-taxation.

The most liberal tax treatment of bitcoin would be if HMRC classified the cryptocurrency a "full currency", according to Asquith. Currency transactions are exempt of sales tax.

But there's no chance of that happening, in Asquith's view: "This is unlikely ever to be applied, as it would give bitcoin the status of a national currency."

HMRC reclassification

There are rumblings that HMRC may move to reclassify bitcoin officially soon. According to Asquith, HMRC officials have told TMF Group executives that a reclassification could come as early as February.

Tom Robinson, co-founder of bitcoin insurance firm Elliptic Vault, who has met with HMRC to discuss taxation issues in the past, said he knows of at least one individual who has been informed by the tax authority that it has withdrawn its previous advice that bitcoins are vouchers, upon inquiry.

HM Revenue and Customs' official stand is that it is continuing to meet with individuals and companies dealing in bitcoin.

When asked to comment on whether HMRC will finalise its position on bitcoin and VAT next month, a spokesperson replied:

“There is a VAT exemption for currency transactions but the currency in question must be legal tender. We have held constructive meetings with stakeholders, but this is a complex issue, and we will continue to listen to arguments for alternative VAT treatments under existing VAT law.”

Richard Asquith has said that his earlier comment on double taxation was inaccurate. The article has been updated to reflect that.

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