HMRC releases guidance on the taxation of Bitcoin. Our Man in Downham Market says that there is a very large problem with this:
The unique characteristic of this currency is, therefore, that a user can create it. This is the supposed adapter at it called ‘mining’. This is and activity giving rise to profit that is equivalent to the age-old right of governments called seignorage: that is, the surplus that arises when a unit of currency is created.
There is no hint in the release as to how that surplus is to be taxed. As a result it is clear that HMRC have missed the biggest potential challenge from Bitcoins, which is that they claim a right of government, attributable to a state, which is to make a surplus from the creation of the medium of exchange. In the process they duck the fundamental destabilising nature of this activity which is intended to create a currency that is beyond the reach of taxation. As an exercise in opening the barn door and letting the horses bolt, this is a particularly good example.
He is specifically worried about the taxation of the seigniorage, the profit differential between the cost of solving the hash that creates the next part of the blockchain and the number and value of Bitcoins received for having done so.
So, what does HMRC actually say?
Corporation Tax, Income Tax and Capital Gains Tax treatment of Bitcoin and similar cryptocurrencies
As with any other activity, whether the treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies will be subject to Corporation Tax, Income Tax or Capital Gains Tax depends on the activities and the parties involved.
Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts. Each case will be considered on the basis of its own individual facts and circumstances. The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable.. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.
For businesses which accept payment for goods or services in Bitcoin there is no change to when revenue is recognised or how taxable profits are calculated.
Corporation Tax: The profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply. We have not at this stage identified any need to consider bespoke rules.
For companies, exchange movements are determined between the company’s functional currency (usually the currency in which the accounts are prepared) and the other currency in question. If there is an exchange rate between Bitcoin and the functional currency then this analysis applies. Therefore no special tax rules for Bitcoin transactions are required. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in accounts and taxable under normal Corporation Tax rules.
Income Tax: The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal income tax rules.
Chargeable gains – Corporation Tax and Capital Gains Tax: If a profit or loss on a currency contract is not within trading profits or otherwise within the loan relationship rules, it would normally be taxable as a chargeable gain or allowable as a loss for Corporation Tax or Capital Gains Tax purposes. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for Capital Gains Tax if they accrue to an individual or, for Corporation Tax on chargeable gains if they accrue to a company.
It appears that they’re saying that such seigniorage profits will be taxed just like any other such seigniorage profits in the economy. Just as with the creation of Luncheon Vouchers, Brixton Pounds or any other form of money creation that involves seigniorage.
And do recall one of the Murphmonster’s basic insistences about the banking system. That it creates money for free for the banks in that system. Note also that he doesn’t complain that that seigniorage is not taxed. For he thinks that it is, in the normal run of things. For those profits are offset against the costs of running the banks and then the recorded and resultant profits are taxed.
He knows already that seigniorage is subject to the usual tax rules. So why is he complaining about Bitcoin being subject to exactly the same rules as the other seigniorage going on?