The future of cryptocurrencies may be uncertain in some people's eyes, but its influence is now felt by businesses and trade. Big companies, including PayPal, Expedia and Subway, are already accepting Bitcoin and smaller companies are following the example.
There are many good reasons to accept digital currencies. Cheap and borderless near-instant transactions allow customers worldwide to purchase services or products from the company. Transaction fees are close to zero. Accepting cryptocurrency can also help companies attract a younger clientele of customers and customers who prefer the simplicity and pseudoanimity of cryptographic transactions.
But there is a significant obstacle for companies that might be interested in accepting, holding and exchanging cryptocurrencies: the murky UK fiscal situation. The United Kingdom was one of the first European countries to issue tax indications on Bitcoin and other digital currencies in 2014. But since then, it has lagged behind its European neighbors.
Many companies in the UK are open to cryptocurrencies, but the confusion of tax liabilities is enough to postpone them.
Home and abroad
Companies with international reach have an even harder job, in step with the different regulations and their implications. Laws in the United States, for example, are vague like those in the United Kingdom. There is a complete lack of guidance from the Internal Revenue Service (IRS) for companies that earn gains on investments or cryptocurrency transactions.
The IRS published a guide in 2014 which states that virtual currency should be considered as a property for tax purposes. This is in contrast to the position taken by its British counterpart, where the cryptocurrency is considered to be more similar to the currency when it is accepted as payment for goods or services. This means that these transactions will be subject to VAT taxes in the standard way.
According to HMRC, "The value of the supply of goods or services to which VAT is due will be the sterling value of the cryptocurrency at the time the transaction takes place." This means that companies that buy assets with cryptocurrency after it has gained value are likely to pay all taxes on its current value, not on its value when originally purchased.
No VAT payments are required when exchanging one form of cryptocurrency with another or with a mining activity.
It's not what you have, it's how you use it
The fundamental position in HMRC's guide to the taxation of cryptocurrency is that it is done with the assets determines the tax treatment. The specific gender of activity does not determine responsibility.
It is also worth noting that the 2014 HMRC guidelines specifically referred to Bitcoin. Smaller types of cryptography may not be subject to these rules. In short, this is an emerging area of taxation and cases are based on their facts.
That said, here are some rules on which we can be relatively certain:
- VAT should be paid when using Bitcoin (and probably other digital currencies) to make transactions in exchange for goods and services.
- No VAT should be paid on the crypto trade in exchange for other currencies.
- Any profits or losses realized during the exchange of currencies must be taxable according to the rules on exchange rates, recorded in the accounts and applied on the basis of company tax.
- Any profits and losses crypto for an unincorporated business should be recorded in accounts, with the income tax applied.
- Any profit or loss on the crypt is subject to corporation tax
Invest in crypt
Of course, many companies are also involved in investing and in crypting. The nature of these relationships is an important tax consideration. If the company is an active or passive investor it is important as the potential tax liability is significantly different. As a guide, the purchase of some coins on which you cling is the action of a passive investor. The purchase of several different coins and their sale is the action of an active and commercial investor.
Advice from consultants
Since the HMRC considers each situation on a case-by-case basis, tax advisors need to do the same while being guided by the objective of helping your company avoid a tax bill at some point along the line. Unfortunately, most accountants and tax consultants know little about the crypto-landscape and prefer to avoid counseling.
In the midst of all the whims of cryptocurrency, companies are faced with another obstacle: to elaborate crypto gains and losses. Both accounting tools and crypto-specific accounting knowledge are missing. This leads to the confusion of inaccurate numbers or even the total lack of reporting.
Unlike other traditional assets, cryptocurrencies are known for their volatility, which makes it much more difficult to manually calculate the value of each incoming Bitcoin and increase or decrease its price over a period of time.
Conventional accounting products and services are not useful for calculating the gains and losses incurred by transactions and holdings in digital currency. Spreadsheets simply do not cut it, especially with hundreds of transactions to keep in mind (often with accounting teams with limited experience in the cryptographic environment). But the right software is designed to track and calculate costs based directly on the transaction information from the blockchain. The elaborated calculations are then added to the tax forms, making it easier to return the files.
Shades of gray
No matter how crypto-specific piece of tax software is accomplished, the vagaries of the law remain. As a provider of a tax encryption software solution, my company has been forced to address the many gray areas of tax laws with a focus on reasonableness, defensibility and consistency.
Although not explicitly stated in the guidelines, the specific identification of each received digital element must be traced from receipt to provision as it is moved from the wallet to the wallet or from the exchange to the exchange. Specific crypto-specific software is the only way to account for irrefutable revenue, gains and losses that can be verified independently by auditors. This is crucial for companies, the sure way to maintain a defensible position.
In all business transactions, the attention of the laws should be certainty. Unfortunately, there is no certainty when it comes to UK cryptocurrency taxes. And we're honest, in this rapidly changing world of digital currencies, it could be a long time before a significant degree of clarity arrives. Until it does, the right accounting software will keep companies on track for compliance.
Sean Ryan, Perry Woodin, founders, NODE 40
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