22nd January 2014
Virtual currencies are on the rise. Bitcoin has soared in value and is increasingly being accepted as a form of payment by a number of companies and organisations.
There are many ongoing concerns about virtual currencies, but one pressing area for businesses is tax. Know one, it seems, is terribly sure how to class Bitcoin - asset, voucher, private money or real money?
In the US, Nina Olson, the National Taxpayer Advocate, said the Internal Revenue Service should give taxpayers clear rules on how it will handle transactions involving Bitcoin and other digital currencies.
Using Bitcoin to buy goods may trigger capital gains and losses or ordinary income and losses, which have different tax rates, she said in her annual report to Congress.
“It is the government’s responsibility to inform the public about the rules they are required to follow,” wrote Olson. “The lack of clear answers to basic questions such as when and how taxpayers should report gains and losses on digital currency transactions probably encourages tax avoidance.”
Responding, the IRS said it is aware of the potential tax compliance risks posed by virtual currencies, and that it would continue to study virtual currencies and provide “some guidance on the tax consequences of virtual currency transactions”.
The main question is whether Bitcoin is classed as property, in which case capital gains rules, or if it is treated as a currency, with normal income rules applying.
Singapore has come down on the property side, classing Bitcoin as goods. The Inland Revenue Authority of Singapore says that the sale and exchange of bitcoins “in return for a consideration in money or in kind is a taxable supply of services subject to GST [Goods and Services Tax]”, which is set at seven per cent.
When Bitcoins are accepted as payments for goods or services, these transactions are treated as barter exchanges because Bitcoin is not considered money or currency by the government. In this case GST could apply to both bitcoins and the goods and services being exchanged.
Similarly in Europe there is a bit more clarity than in the US. Bitcoin has been recognised by the German Finance Ministry as a "unit of account", meaning it is can be used for tax and trading purposes in the country.
Bitcoin is not classified as e-money or a foreign currency, the Finance Ministry said in a statement, but is a financial instrument under German banking rules. It is more akin to "private money" that can be used in "multilateral clearing circles", the ministry said.
Meanwhile, Norway is treating Bitcoin as property. “Bitcoins don’t fall under the usual definition of money or currency,” Hans Christian Holte, director general of taxation in Norway, told Bloomberg in an interview.
Instead, the Scandinavian nation is classifying Bitcoins as an asset, subject to capital gains tax.
The UK is also considering its stance, with HM Revenue and Customs apparently eyeing a plan to classify Bitcoin as ‘private money’ like in Germany. Currently Britain treats Bitcoins as a voucher.
"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," an HMRC spokesman said.
"Most assets are liable to Capital Gains Tax when sold or disposed of. This includes gains on non-sterling currency, other than foreign currency bought for personal use outside the UK.
"We are reviewing this very complex area and considering how VAT should be applied."
It's a complicated picture at present but the various tax implications are likely to ironed out soon as Bitcoins become used more and more around the world.