This week saw the release of an HMRC Brief withdrawing plans to make digital currency (of which the best known is Bitcoin), chargeable to VAT.
In December 2013, HMRC indicated that it would review the position on the taxation of the crypto currency after business concern at an earlier ruling classifying crypto currencies as gift vouchers, thus making them subject to VAT. HMRC has now advised that it will not levy VAT on Bitcoin "mining" (a name given to the creation of the digital currency through complex computer algorithms).
HMRC provided clarification on other forms of taxation in the Brief in respect of Crypto currencies. For companies exchanging the currency resulting in profits and losses, these will still be subject to corporation tax, with the general tax rules on foreign exchange and loan relationships applying.
Unincorporated businesses will still be expected to provide details of any profits or losses in respect of any Bitcoin transaction in their accounts, with normal income tax rules applying. In terms of any gains or losses incurred on Bitcoin, these are chargeable or allowable for Capital Gains Tax purposes if they accrue to an individual or, for Corporation Tax on chargeable gains that accrue to a company.
In short, crypto currencies will be treated in the same way as Euros or Dollars or any other foreign currency.
Bitcoin has rapidly evolved into the world's best known "decentralised digital currency". It operates completely independently of any financial institution and all transactions are recorded on a shared public database. Bitcoin has become a controversial subject across the world with several countries such as Russia and China imposing strict restrictions on the currency due to concerns that it is a means of tax evasion and money laundering.
The digital currency may be held as an investment but can also be used to pay for goods and services. Currently in the UK, some retailers and merchants already accept Bitcoin as a method of payment, with the use of the crypto currency likely to increase substantially.
The HMRC Brief 09/14 can be viewed here.