Leiden Law Blog

How to tax Bitcoin?

How to tax Bitcoin?

Bitcoin, a decentralized cryptocurrency with no government or central bank, grabbed the public attention as its value skyrocketed at the beginning of 2012. Interestingly, the rise in the Bitcoin value coincided with the economic collapse of Cyprus. People who lost faith in financial institutions started putting more trust in independent peer-to-peer payment systems. Between August and December 2013, Bitcoin usage increased by over 75% and the market value of Bitcoins in circulation increased more than ten-fold (from about USD 1 billion to USD 12 billion).

For a long time, tax authorities seemed to ignore the problem of virtual currency. Taxpayers turned to the Internet for help and found a lot of misinformation circulating there. There are a number of websites, wikis and blogs that provide differing opinions on the tax treatment of virtual currency, including some that could lead taxpayers to believe that transacting in virtual currencies relieves them of their responsibilities to report and pay taxes.

However, in the last months, several countries (the Netherlands, Norway, Singapore, the United Kingdom and the United States) have presented their views on the status and taxation of digital currencies. While many of these guidelines are limited to the statement that the general rules apply, some make more detailed comments.

In November 2013, the Norwegian Directorate of Taxation (Skatteetaten) published a statement explaining that Bitcoin is an asset and not a currency. For VAT purposes, supplies of Bitcoin constitute taxable supplies of electronic services. Since Bitcoin does not have the status of a legal tender, the exemption for financial services cannot apply. However, the UK tax authorities (HMRC) took a different view. The HMRC is of the opinion that exchanges of Bitcoin into traditional currencies fall under the exemption for financial services. In view of the different national responses, a question arises whether the status and tax treatment (at least for VAT purposes) of virtual currencies should be clarified at the EU level.

The provision of guidance by tax authorities is a positive development. It promotes compliance among taxpayers who want to report their transactions in virtual currency properly and reduces the risk that users of virtual currency will be confronted with tax consequences that they did not anticipate. It also demonstrates that tax authorities are able and willing to respond to innovations in the digital marketplace. A study from the European Central Bank suggests that the use of virtual currencies is expected to grow in the future. If the future of electronic commerce entails an increasing use of virtual currencies, it is critical that our economic, political, and legal institutions are prepared to deal with them and to incorporate them into the existing legal framework.

1 Comment

Amanda
Posted by Amanda on October 17, 2014 at 16:12

Read It!!!

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