If you MUST declare it all, I'd try to make it look like bog-standard FX trading. Bitcoin is just another currency, right? And if you account for all transactions as standard FX movements then your average taxman will understand *everything* you're doing. This is probably your best bet if all you're doing is trading... if you're actually selling goods and services (whatever those may be) then you'll end up having to explain exactly *what* those goods and services really are. Whether you would appreciate this is your business entirely...
Yeah this is my concern, i'm not selling goods or services, just trading so i can keep track of the various trade numbers that are public. However i imagine even this may not be good enough for the taxman due to the nature of bitcoin.
It is sad there is so much suspicion surrounding bitcoin. I am grateful for your more detailed help.
Assuming here (from the talk of HMRC) that you are domiciled for tax purposes in the UK, you are meant to declare all income *repatriated to the UK* in your SA return. I may be wrong, but IIRC money earned abroad and not returned to the UK isn't taxed in the UK. It's not like the US system where the IRS requires *all* globally earned income to be taxed in the US.
So you have to firstly account for where the income actually moves from and to. Bitcoin is tricky because the Internet is a somewhat difficult 'nation state' to identify (the correct answer to this question will need a very tech-savvy tax lawyer's contribution). Personally, whilst the Bitcoins are still in your Bitcoin wallet, I say they're offshore from ALL tax jurisdictions and it's up to the tax jurisdiction to specifically pass legislation to grasp control of 'sums' of Bitcoin 'currency' before this 'money' can be taxed. After all, given the current status, Bitcoin is no different to your 'money' attribute in some big multiplayer online game... though I may be out of touch since I'm old and stopped playing games around the time of the first Half-Life
Though these 'second life' type things seem rather oddball to me (apologies to all aficionados on this forum...), I've never heard of the *UK* taxman going after profits within virtual worlds.
The key is to think like the taxman. They're people too! Also, they tend to act like slightly self-righteous accountants. Accountants need to be reasonably intelligent in order to study the necessary learning and pass the exams (and keep up to date). So, switching personas... what would a taxman do? I think he or she would immediately simplify Bitcoin to 'A.N.Other Currency' - OK, where's the bank account? On the Internet, distributed? Right, that's 'offshore bank account' then. Nice and simple, cuts through all the B.S. - and reduces all issues with Bitcoin down to nice off/on-shore FX transactions, which can be accounted for numerically and the tax calculated easily.
I think that if you present the business activity in this fashion, then the entire 'Bitcoin / mass media / buying drugs / suspicion' B.S. will be ignored absolutely by the taxman as they are professionals, by and large. OK, you've spotted a niche, you're FX trading with Bitcoin vs. 'real' currencies. AFAIK, you only account for the income when you convert to GBP and deposit within an onshore bank account.
The big difficulty that *I* can think of is how you convince the taxman that your accounting for *losses* isn't bogus - after all, running your P&L depends on whether each trade is in the money or not. And your profit per trade will depend on prevailing FX rates, which for Bitcoin are less transparent than the trillion-pound FX market. Give the taxman bogus FX rates and you can make your trade history average out at zero profit (and hence zero corp tax - though that won't help you pay yourself any dividends, assuming you're running a limited co). So you really need *some* sort of attribution for historical Bitcoin FX rates, and the MTGox sploit didn't help matters here.
But, in general, the taxman will be fair if you *talk* to him/her. I've run into aggro with my little company before and had to cut a deal with the taxman. It's as easy as being friendly and honest. You can't cut a deal with Customs... but they shouldn't be involved here until I start getting VAT notices with the word 'Bitcoin' in them
If you *REALLY* want to pay tax on all your trading profits then you'll need an attributed source of FX rates, which I'm sure exists in your accounting system (or Excel...
) - maybe download a chart from bitcoincharts.com, and explain this with your return. If you get audited, be prepared to either brief your accountant / tax adviser *thoroughly* or do the job yourself (risky) and chat with the tax man / lady to explain how your FX rates (and profit / loss figures) are reasonable.
My gut feeling (from getting interested only a few weeks ago) is that daily GBP Bitcoin rates aren't massively liquid, and hence oddly profitable / loss-making trades could easily fit within a standard deviation or so daily... whether you choose to cook the books and reduce your declared profit (and tax) is up to you, but I'd personally take the simple route and not declare any of it.
Once something is declared, if you get a taxman interested then he/she will dig and dig - the day job is boring so anything potentially 'new' will be jumped on. I reckon declaring FX trading profit on Bitcoin is a losing proposition - the taxman will question your rates (and profits) regardless of their honesty and you'll have to show proof of each transaction (actually quite easy with Bitcoin transaction histories!!!!). But it *is* possible. If you're making thousands (or more) a month then it's probably worth declaring... otherwise take a leaf from the small-time silver (and gold) coin traders and don't declare. For example - I may collect coins... but do I account for their value numismatically, or as bullion spot prices (which I cannot buy or sell at), or face value (silly, but why not?). Too many questions means the taxman will simply ask you twice as many...
Sorry for long post, hope it's of some use. FWIW I run a company and do all the accounting and tax returns (company and personal SA) myself, so have well over a decade of experience but am NOT A TAX LAWYER so, as always, caveat emptor (and you didn't pay for this info, unless you've sent me some BTC, mwuahaha)