The wondrous Murphmeister on the taxation of Bitcoin

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?

26 thoughts on “The wondrous Murphmeister on the taxation of Bitcoin”

  1. I’m going to take a wild stab in the dark and say “because he’s a damn fool who doesn’t understand the subject he’s flapping his mouth about and who thinks the answer to every problem is MOAR TAXS”

  2. because he doesn’t have an elementary grasp of logic let alone how Bitcoin works.

    For one thing, bitcoin miners do not “create” bitcoins, they are awarded bitcoins for mining, which is the friendly name of the system that confirms transactions.

    I guess he read the first couple of paragraphs of the Wikipedia article (which are incorrect about mining) instead of the Bitcoin wiki or (god forbid) the original paper.

  3. I have reached the conclusion that our friend is actually really quite stupid. I don’t mean that as an insult, merely a description. At first sight he appears to be a thinker, but on closer inspection you see he’s a “cargo cult”: he puts on the appearance of being an intellectual (writes polemics on blogs, goes to conferences, advises NGOs) but genuine skills such as logic and reasoning are entirely absent.

    It’s a good job he’s a complete WGCE: if he were actually pleasant rather than nasty and abrasive he’d actually be quite dangerous.

  4. Well., one supposes he could get his head round the notion BitCoin isn’t a currency. Currencies being, by definition, things that States create. Not individuals.

  5. I think Ritchie has passed the point where he sees any value in commercial activity beyond that of generating tax yield for the State to waste.

    He has passed the Courageous Event Horizon.

  6. So in other words, Bitcoin mining is just like ordinary mining. If I discover a rich seam of ore in my back garden, I can start mining it, store it in my garage, and ultimately sell it for cash or barter it for other goods & services. There is no tax liability while it remains unsold in my garage, but as soon as it is sold I have to declare it on my self assessment, and possibly register as self-employed. If I sell a lot of the stuff I would have to register for VAT too.

    If I use my mined Bitcoins to buy goods & services, then it’s analogous to bartering my ore. The transaction is treated as a sale, using the value of the Bitcoins in Sterling at the time of the transaction.

  7. no, bitcoin mining is not like ordinary mining – I think it’s a misnomer.

    you are paid in bitcoins for confirming a transaction between other parties. If Arthur witnesses that Barry gave Cassie ten quid (we don’t care what for) we don’t call that mining.

  8. He writes: “There is no hint in the release as to how that surplus is to be taxed.”

    Given that this is exactly what the HMRC guidance does indeed do and that he himself drew our attention to it on his blog, one of the following statements about Ritchie must be correct:

    1. He simply hasn’t bothered to read it properly.
    2. He has read it, but hasn’t understood it.
    3. He has read it, understood it, but doesn’t care; he is not going to let the facts get in the way of his pre-determined and prejudiced monologue.

    Whichever is correct, anyone including this junk on a blog entitled “Tax Research UK” is *trading* under false pretences.

    For the benefit of Richard Murphy: here *trading* is used in the context essentially outlined in the HMRC guidance shown above on Tim Worstall’s blog and which I believe you yourself have had the opportunity to read (whether or not you availed yourself of that opportunity).

  9. Another fascinating inset to the man’s mindset from the very first response in the comments

    ‘someone has created a lot of ‘wealth’ here and it looks untaxed’

    Ironman – I think all 3 statements could be right – tend towards 3 myself…. his lack of self- awareness (never more evident than in his umbrage at Judith Freedman of the OCBT describing him as ‘bullying’ and ‘talking to himself’ a couple of days ago) seems to be intensifying as he sees his dreams of power slip away. (I’m informed his position as Chief Economic advisor to the Miliband government is now in serious doubt)

  10. The Miliband government’s position as Chief Economic advisor to the Miliband government is now in serious doubt.

    But we digress:-

    “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”

    And quite why should this be a challenge to HMRC? How on Earth is it a part of HMRC’s remit to accept this as a challenge?

  11. “And quite why should this be a challenge to HMRC? How on Earth is it a part of HMRC’s remit to accept this as a challenge?”

    Because it would give his PCS chums something else to stick their oar into?

  12. And I see today that he is worried about the rule of law being undermined. No, not as you might hope by considering the implications of his own proposals.

    His own contempt for the rule of law is evident but it suits his purposes to refer to it when necessary.

  13. It’s a real shame; I’d love it if someone had found a way to banjax Ritchie’s Curajus State by ignoring tax completely.

    Though it is some small consolation that he clearly lies awake a-night fretting that they have.

  14. And he is interested in press freedom. Conveniently, however, a newspaper with a proprietor of whom he disapproves isn’t free and therefore must be subject to prior restraint a la Leveson.

    I’m not sure whether that particular post was sponsored by Hacked Off, the PCS, Unite or was simply covered by his ‘educational’ or ‘research’ grant from the Joseph Rowntree Foundation.

  15. Slightly OT, but picking up on something Andrew M said, is it the case that a gold miner doesn’t pay tax on the gold extracted from the ground until it is either sold for cash, or bartered for goods/services? I’ve been watching programs about gold miners in the USA and they are pulling all this gold out of the ground – the whole thing must be rife with tax evasion, as how can the tax man ever know how much gold you’ve found? By definition is a pretty random discovery process – one minute you’re producing, the next you’re out of decent ore, and searching for the next pay streak, so the temptation to hide away a few ounces here and there must be immense.

  16. Has Murphy overlooked the minor point of national sovereignty? If Bitcoins or Yen are created in Japan by a Japanese national, how has HMRC missed anything by failing to tax the seigniorage?
    In fact there is zero seigniorage to tax since the creator, Mr Nakamoto (or whatever his real name is) does not levy a charge when creating a bitcoin, the value (in the eye of the beholder) only emerging when the bitcoin is newly mined (or awarded to a block).

  17. Speaking of mining, I felt the onset of apoplexy when I saw a couple of posts above from one called Ivor.

    For one horrifying moment I thought the infamous Ivan Horrocks (aka Bollocks), who as number one paid up member of the Murphy fan club is the most assiduous miner of the R Murphy arsehole and its products, was posting here.

    Most profound apologies to Ivor.

  18. Jim,
    It’s no different from e.g. an artist selling her paintings or a cleaner selling her house-cleaning services. If she sells privately and in cash, without declaring it, then it’s tax evasion. Plenty of cleaners get paid cash in hand since they’re unlikely to be caught out. As soon as there’s an electronic trail, bank accounts, etc., then HMRC are liable to find out.

    Mining is almost never cheap enough to be run as a cash-in-hand operation; so it’s not an issue.

  19. Jim

    Nobody is ever charged to tax on the product of their labours, be it mining, painting, writing blogs expressing exactly the opinion you’re told to express, whoring, whatever. You are charged to tax on your profit when you come to SELL the products of your labours. So the miner will never be charged tax on the gold if he never sells it but sticks it in his bedroom or in his teeth, the whore has no tax to pay until the day she asks her punter for cash and the leftist blogger will never have tax to pay because nobody’s paying him to write the blog; they’re giving him an educational or research grant. Clear?

  20. Ritchie appears to be fussing that the new guidance doesn’t adequately define a trade, all the steps in that trade and consider all the possible permutations of a trade. Presumably he wants legislation to lay that out too. This despite:

    1: Hes in favour of a simpler tax code, and any attempt to define bitcoin trading would expand that, and also be subsequently cited as required for any trade.

    2: There is no existing legislation defining a trade. Only case law defines a trade.

    3: Subsequent governments, and HMRC, have consistently and intentionally not defined a trade through legislation, relying on case law and a ‘balance of factors’ to define a trade, as defining a trade with hard legislative boundaries rather than grey edges opens the door to all sorts of avoidance opportunities.

    I’m upgrading him from ‘Cretin’ to Dribbling Cretin’

  21. While the rest of us are concerned about the ongoing and seemingly unabated waste of the current tax money on duck houses, stuffed snakes and funding the ex-PM to the tune of £100,000+ a year (not including wages) whilst he spends less than 15% of his time in the office, and he’s not an unusual case.

    … Richie is worried about taxing a digital currency.

  22. The odd thing (as far as I can see) is he’s missed the main “problem” with anything to do with HMRC and Bitcoin – namely that the value of the things is up and down more often than a tart’s pair of knickers, which means for HMRC to demand £sterling equivalent to a lot of bitcoins acquired at lots of different times will involve filling in forms of such length and complexity no-one will actually understand them.

    Wibbling on about the (small) profit miners make (after you take out the cost of the kit and the electric to run it, it’s not exactly instant riches) shows he’s missed the point entirely.

  23. I genuinely don’t understand why Richard is treating a VAT brief as if it were a policy decision.

    The guidance appears to be solely intended as HMRC’s interpretation of the current law in relation to Bitcoin. Richard has concluded that application of the normal rules will exempt Bitcoin mining from taxation.

    However, looking at the badges of trade (http://www.hmrc.gov.uk/manuals/bimmanual/bim20205.htm) it’s hard to arrive at a similar conclusion that mining Bitcoins for profit will not be considered as a trading activity.

    The question of trading obviously depends on the facts in each case, which is why HMRC cannot say outright that seigniorage is always trading.

    I don’t think it would be sensible for them to say so, from a strategic point of view as well as a factual one. People might decide that getting tax relief for the losses incurred on a speculative punt at mining a Bitcoin makes it an attractive form of gambling.

    But if people do acquire Bitcoins through something considered to be “gambling”, the fact that it would not be taxable is compensated by the fact that no loss relief has been given to other efforts to yield Bitcoins in the same manner.

    The only problem arises if many Bitcoins are successfully mined through “gambling” whilst many attempts at trading are fruitless, creating an imbalance in the taxation of mining.

    But from the odds involved, that won’t happen without artificiality being involved and any artificiality probably wouldn’t be allowed to stand by the judiciary (or targeted legislation would be produced fairly sharpish).

    I don’t think HMRC could have said much more than they have, in all honesty.

  24. I think Murphy’s worried that people will look for loopholes to find ways that will mean bitcoin mining can escape tax.

    I do find it interesting that he’s the only person who that seems to have occurred to, never mind being the only one who thinks it’s any sort of possibility.

    I think he’s just overthinking things. Bitcoin miners are doing something that you could – if you squint – see as the domain of Government, so this is a whole new paradigm and the old rules don’t apply! Except that they aren’t, and they do… this is why we have principles-based law not detailed prescriptions.

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