Well, fancy that, Bitcoin will be taxed in a sensible manner

By Tim Worstall , written on March 5, 2014

From The News Desk

News out from the tax authorities in both the UK and Japan that Bitcoin will be taxed in what seems to be an eminently sensible manner. In, in fact, the only manner that really makes any sense at all. That is, Bitcoin will be taxed just as any other virtual currency is or has been. All entirely reasonable as the "crypto-" part of the alternative currency here doesn't make a blind bit of difference to the underlying economic reality of the transactions occurring and thus nor should the taxation treatment.

The British announcement is here at HMRC. Perhaps the headline point is that purchases and sales of Bitcoin itself will not be subject to VAT (ie, sales tax) and that's the only part that has ever really been in doubt. Given that VAT is not charged on purchases or sales of $, £, €, luncheon vouchers or the Brixton Pound (those last two nowadays very minor alt-currencies although paper based) then this makes complete sense. However, purchases of goods and or services made in Bitcoin, or other alt- or crypto- currency will indeed be subject to VAT. On exactly the same basis as any other form of payment for the goods in question. Newspapers are VAT free so Bitcoin at the newsagent to purchase them is also VAT free. Beer is not VAT free so buying beer with Litecoin will pay VAT (and, obviously, all of the excise taxes the bastards put upon that staff of life).

Moving on to the process of mining coins themselves, this is clearly an activity being undertaken for gain so falls under all of the usual rules. Income is recognised, the costs of gaining that income are deducted, a profit declared and the relevant taxes will become due. Nothing to do with it being Bitcoin activity being taxed, just on the same basis as any other such attempt to gain some extra spending cash. If you're a sole trader doing it then you're under the sole trader rules, if a corporation under the corporate and so on.

Absolutely the only interesting part of this tax treatment will be on the depreciation of mining rigs. As we know they go from very expensive to worth spit in a few months as hash speeds increase but depreciation rules don't allow you to write off such a capital asset that quickly. It'll be interesting to see whether HMRC are flexible here, and are willing to accept that rigs have this accelerated depreciation and thus can perhaps be written off in the year of purchase.

As to people using alt-currencies to actually buy things, or accepting for the things they sell, they're just going to get treated like any other sale or purchase. The only complication will be at what exchange rate the sales/purchases are recorded and standard accounting already allows for a useful series of different methods (at conversion rate on day of transaction, on various average rates like year end or beginning etc).

In essence, the actual announcement is all incredibly boring. For it's simply telling us that Bitcoin and the rest are going to be taxed exactly as a few moments' thought would have told us it will be. Contrariwise, that in itself is a statement of some interest. For we've also got now a statement from the tax authorities, and thus from at least one part of the greater authorities, that alt-currencies are just another way of doing something that we know how to deal with in a tax and economic sense. For there have been any number of alt-currencies before and they have all been dealt with in exactly this manner.

Meanwhile the news from Japan is much the same:

Significantly, the guidelines will call for taxing Bitcoin transactions. Purchases made in bitcoins will be subject to Japan's consumption tax, which is set to rise to 8% on April 1. Trading gains will be taxed, and companies will need to pay tax on revenue earned from Bitcoin transactions.
Exactly the same in fact. Transactions in Bitcoin will be subject to the same income, corporation and sales taxes as transactions using any other currency. It's true that Japan has also declared that Bitcoin is not a currency, seeing it as a commodity more akin to gold. But they're sure taxing it as a currency.

As I say, I'm not sure there's all that much remarkable about these rules on consideration. For it's the obvious way to deal with it all. No one at all, at least I hope no one did, thought that governments wouldn't want their slice of the action and this method is the only rational one they could have chosen. We might perhaps think of this as another small step along that path to boring normality.

[Image adapted from Thinkstock]