Is there a future for Cryptocurrency and Bitcoin?


When cryptocurrencies first launched, they were thought to be too small to be worth worrying about and a small amount of tax leakage was considered to be acceptable. However, governments are now concerned that they are losing larger than expected potential revenues, as cryptocurrencies may allow people to trade and keep a low profile. It is therefore ripe for a review, in line with more widespread clampdowns on tax dodging.

This would lead to two possible choices. The first is to ban trading. South Korea and China have already stated that they may ban the trading in bitcoin and the result was a sharp reversal in the bitcoin price with some numbers showing $200bn wiped off their value.

The second option is that countries where there is a capital gains tax, will want to tax any profit made from transactions in these currencies. If people use the currency to purchase goods and services, authorities will look to see how they gained the cash to do so, and assume that the bitcoin is at some point exchanged into regular currency. This is the route HMRC has taken here in the UK and they have issued specific guidance to this effect.

In addition, if transactions are carried out using cryptocurrency and not transferred into cash, governments will then want to put an attributed value on the transaction and charge VAT or another similar tax.

Another consideration when looking at the cryptocurrency future is that tax authorities look for shortcuts to help them identify tax evasion. These include offshore bank accounts, complicated tax structures and extravagant lifestyles that do not tally with a regular income. Therefore in some cases, bitcoin and other cryptocurrencies are now being used to identify the unusual activities too.

For those already trading or thinking of trading in bitcoin or other cryptocurrencies, it is therefore increasingly important to understand the tax position and resulting obligations and liabilities so that any potential traps or issues are avoided.

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