The UK Taxman Looks Set to Treat Bitcoin Like an Actual Currency
For Bitcoin businesses, London is the place to be right now.
Update: HMRC has published their full brief here.
While last week was a pretty dark time for many in the Bitcoin community, what with the collapse of the Mt. Gox exchange and the apparent disappearance of nearly half a billion dollars worth of the digital currency, this week brings some positive news for the scene.
The Financial Times reported yesterday that the UK’s tax authority, HM Revenue and Customs (HMRC), plans to scrap their earlier ruling to charge value-added tax (VAT) on Bitcoin trading. “HMRC went a step further, saying it would not charge the tax on their margins either,” the FT wrote.
While the taxman is yet to issue official guidance, and so the news must be treated as somewhat provisional at this point, it’s a welcoming gesture that could set London at the forefront of innovation in the cryptocurrency sphere. Last year, HMRC classified Bitcoin as a “voucher”—which meant trades would incur 20 percent VAT—but reconsidered that decision after UK Bitcoin businesses complained it would make them unable to compete on a global level. According ti the FT, they said they would not charge the VAT in a meeting with UK traders last week.
I spoke to two figures in the British Bitcoin scene about what the news meant for them. Tom Robinson, director of the UK Digital Currencies Association and co-founder of Elliptic, a UK-based company that offers storage and insurance for bitcoins, said that above all, the announcement brought real clarity to businesses on how Bitcoin transactions will be taxed.
“I think in general it brings legitimacy to digital currency businesses in the UK, so it’s going to make it much easier for us to operate, hopefully for us to get bank accounts and get investment,” he said. Banks have been reluctant to give Bitcoin businesses accounts because of the lack of regulatory oversight.
Simon Dixon, co-founder and CEO of Bank to the Future, a company that works with Bitcoin start-ups, echoed the sentiment. “HMRC coming out and recognising Bitcoin has something that needs to have its own policy is really big news,” he said in a phone call. “Essentially what they’ve done is they’ve treated Bitcoin as if it were a currency—without calling it a currency—in terms of tax treatment, which we feel will have a profound impact when the FCA (Financial Conduct Authority) and regulators release what their thoughts are on it.”
This is an important point; governments and regulators worldwide have had trouble figuring out what the hell Bitcoin actually is, which has led to a mess of different regulations and tax rules. While HMRC shied away from saying it was a currency, he pointed out that their ruling “kind of accepts that it’s being used like a currency,” which he hoped would encourage the FCA to treat it as such. “I would like to see the FCA treat Bitcoin like any other currency, so then it would fall under things like the Payment Services Regulations and the Money Laundering regulations,” he said.
HMRC offices in London. Image: Carlos Delgado/Wikimedia Commons
Both entrepreneurs see regulation as pivotal to Bitcoin’s future, a view that aligns them with many of their US counterparts sets them apart from some of the core Bitcoin community, who oppose regulation on more political grounds (see Cody Wilson’s crypto-anarchist, anti-venture-capitalist stance). But for businesses to blossom and innovation in the field to push forward, they argue, regulation is a necessary step.
“For me it’s important to recognise that Bitcoin itself won’t be regulated, but Bitcoin businesses, that sit on top of Bitcoin and build on top of Bitcoin, if they operate in a regulated field, should be regulated, and it can only be seen as a positive thing,” said Dixon. It’s undeniable that this kind of regulation is certainly more promising than the actions of some countries, like China, which clamped down on its banks dealing in virtual currencies last year, or Russia, which simply banned Bitcoin last month.
Official recognition and regulation of Bitcoin also helps take it away from its Wild West past, and associations with illegality from things like Silk Road and the related recent arrest of BitInstant's Charlie Shrem. It’s also a step towards better security, as proper regulations and oversight would likely help prevent avoidable disasters like the Mt. Gox collapse—which many Bitcoiners blamed on the exchange’s lacking technical proficiency and/or slowness to act. The more anarchical of Bitcoin evangelists might not like that, but the general public probably will.
Robinson said he thought HMRC’s actions would be a first step towards Bitcoin going mainstream. “We believe in the transformative potential of cryptocurrencies and technology and we want to see as many people as possible benefit from this technology,” he said. “And we think the best way to do that is through proper regulation.”
It’s a bit of a coup for UK-based Bitcoin businesses, and puts all eyes on London for the future of digital currencies. As if to solidify the British capital's place at the head of the scene, the Financial Times also reported that the Bitcoin Foundation plans to relocate from the US to the UK. “We now have a head-start and it gives a signal to the wold that London is welcoming Bitcoin with open arms,” said Dixon.
But Robinson suggested that a UK boost wouldn’t necessarily come at the detriment of the US community—quite the opposite, in fact. “I think the whole world looks towards the UK in terms of financial regulation and taxation so I think it’s going to have a big effect worldwide,” he said.
HMRC is expected to release their tax rules in the next week or so.