2017 may be remembered as the year that bitcoin entered the ‘big league’. This year, the price of bitcoin has risen by more than 1,000% and its value recently surpassed $11,000, James Connington writes in The Telegraph
Since publication of Connington’s article, the price has continued to rise. On 7 December, the price of a single bitcoin ranged from $15,592–$18,259, according to a report
. And on Friday 8 December, it briefly crossed the $17,000 mark
This surge hasn’t lead to mass selling though. Connington notes: “Exchange crashes have caused difficulties for many attempting to sell.”
However, as Connington states, “with profits, comes tax” – but HMRC has not yet “kept pace with bitcoin fever”.
The last time HMRC issued guidance on this was March 2014, when bitcoin was valued at $630. Connington outlines HMRC’s guidance: “It says that cryptocurrency gains and losses fall under the capital gains tax (CGT) system, but also that if a transaction is speculative enough to be deemed ‘gambling’, it may not be subject to tax – and losses would not be claimable for tax purposes either.” Whether or not a transaction will be labelled as ‘gambling’ will be decided on a case-by-case basis.
Connington cites a trio of potential tax avenues for HMRC to explore from accountancy firm Saffery Champness’ Robert Langston. Writing in Tax Journal
, Langston identifies three tax treatments as: “trading profits falling under income tax; gambling transactions which are not subject to tax; and capital gains subject to CGT”.
The first treatment could work because a high amount of short-term cryptocurrency transactions could meet the number of “badges of trade” needed to verify if someone is trading. However, when legal case law is considered, it becomes “very unlikely that cryptocurrency profits would be treated as trading profits”.
The second treatment could work now that the crytptocurrency market is more established. Langston says that when this is taken into account, it is “difficult to see how the profits on mainstream cryptocurrencies [such as bitcoin] could be seen as gambling profits”.
The third treatment could work because, Langston says: “HMRC’s guidance presupposes that cryptocurrencies can be chargeable assets for CGT purposes. This is probably correct; they are intangible assets which carry certain rights, and can be bought and sold.”
The Telegraph article
In the US, “cryptocurrencies are under scrutiny like never before”, according to Tanzeel Akhtar in TheStreet
The Internal Revenue Service (IRS) has won a lawsuit against digital asset broker Coinbase and, with that victory, access to records detailing bitcoin trades surpassing $20,000 from 2013 to 2015.
The IRS “is set to collect taxes from 14,355 accounts”, which makes up nearly nine million transactions. There are nearly six million customers on Coinbase but, according to a US government filing, cryptocurrency holdings have been reported on the taxes of less than 1,000 US citizens.
"Cryptocurrencies are under scrutiny like never before"
Akhtar spoke to the creator of IRS-reporting software platform Node40 Balance, Perry Woodin, about tax and bitcoin.
“Cryptocurrency investors really need to treat their assets in the same manner that they would any other investment,” Woodin advises. This means accurate record-keeping and transacting from a cryptocurrency wallet that you own.
“Investors who rely on reporting from exchanges like Coinbase could be in for a rude awakening when they realise their transactions may not have actually taken place on the blockchain, but rather on the wallet provider’s company ledger,” Woodin warns.
Incoming income tax
In South Korea, the country’s National Tax Service (NTS) is going to “push for” the imposition of income tax and transfer income tax on virtual currencies, Yoon Yung Sil reports in BusinessKorea
Sil references a quote by Kim Byung-il, an economics and taxation professor at Kangnam University. He told the 2017 National Tax Administration Forum that when it comes to “cyber money” there are “no unified tax bases”.
He said he has examined other countries’ “legal characteristics of virtual currencies and related taxation trends” and come to the conclusion that the South Korean government needs to “specifically set up a detailed tax standard and introduce the exchange registration system and identification system in order to prevent tax evasion”.
Sil outlines policy from other major countries, including Australia and Germany, where “virtual money” is classed as an asset, so income tax or transfer income tax is levied when income occurs.
An NTS official is quoted as saying: “The basic principle is to tax the income. It is important to collect detailed history data, like who made transactions and how, in a bid to impose taxes. To this end, we are considering the improvement in systems.”
Bitcoin, and cryptocurrencies generally, know no nation. Tax, too, is universal. So how can these two meet? The pace at which bitcoin is soaring is in stark contrast to the reaction time of bodies such as HMRC or the IRS, who are struggling to keep pace with change. Perhaps this new fiscal form requires something equally as new to keep it in check.