Bitcoin: a contractor's guide for tax purposes
Interest in Bitcoin has shot up since the virtual currency's inception in 2009, and many a contractor is considering how it could play a part in their business, writes James Poyser, co-founder of online contractor accountancy firm inniAccounts.
While Bitcoin only exists in a virtual electronic form, this does not mean your Bitcoin transactions are immune to business taxes. In this article, I’ll explore how you must treat Bitcoin transactions for tax purposes.
Bitcoin: what’s it all about?
Bitcoin is an electronic currency with no central bank controlling the issuing of the currency. Despite the fact Bitcoin does not physically exist, it can be used in a way similar to a conventional currency. Indeed, it's possible to use Bitcoin to buy and sell goods and services, and many people are also using Bitcoin as a (somewhat volatile) investment vehicle. There are a number of established exchanges where you can exchange Bitcoin for recognised currencies (like Pounds and Dollars), much like you might do when travelling abroad.
We speak to many contractors who are considering using Bitcoin in one of two ways: either as a mechanism for accepting payments from clients or as an investment. The most common questions are around tax, and the answer we give is straightforward: HM Revenue & Customs treats Bitcoins as they do any other non-sterling currency.
Buying and selling Bitcoin
If you purchase or sell Bitcoin via an exchange, you may be charged a commission fee on the exchange. This commission fee is exempt from VAT.
Using Bitcoin to buy or sell goods and services
If you buy or supply goods and service using Bitcoin then regular VAT rules apply. If the transaction would normally be subject to VAT then you must convert the Bitcoin value to Pound Sterling and calculate and charge VAT on this figure.
Holding Bitcoin in your company
If your company holds Bitcoins (either as an investment or to purchase goods and services) then any rises or falls in the Bitcoin exchange rate will result in a taxable income or loss for your company. This profit or loss from dealing Bitcoins counts as a capital gain and is subject to corporation tax.
Holding Bitcoin personally
If you decide to hold Bitcoin personally (outside of your company), then there are still tax implications. If you make a profit from dealing in Bitcoin then you will be subject to capital gains tax, which is calculated in the normal manner and declared on your Self Assessment tax return. This means that if your total gain for a tax year exceeds £11,000 then you will be subject to capital gains tax.
While the future of Bitcoin and other electronic currencies may not be clear, taxation certainly is: it's business as usual.