Ok digging into this deeper I found how Alpha Technologies assumed that miners are businesses. They don't have a legal attorney. They themselves imposed the ruling and all based on what they think the future regulations minght be because of some interpretation they made from the US IRS rules
mjakram
Accounts Manager
Administrator
*
Cryptocurrency Tax Blog
« on: May 28, 2014, 06:56:16 PM »
A Little Bit about Myself
I am employed part time as the Accounts Manager of Alpha Technology and a Chartered Certified Accountant, qualified since 2012. I have an extremely high interest in different areas of taxation beyond and above the taxes I deal with in my day to day work.
I am a keen student of Tax and am currently working towards the Chartered Tax Adviser qualification (which is the “elite” and highest tax qualification you can achieve in the UK) and am looking to qualify as a CTA in late 2014.
Currently, working my regular full time job in general practice and dealing with the Accounts and Taxes of small to medium sized businesses. As of yet, none of our clients accept or deal with crypto currencies, however as the market for crypto currencies matures I am sure a lot of them will start to do so.
Unfortunately, I would not have any details or be able to help you with any questions relating to the operations of the business or any engineering related questions. Please direct these questions to one of the other Admins in this forum
What I would like to obtain from this Blog
My goal is to help people understand the tax implications of certain activities such as mining, and trading/ holding “crypto-coins” such as bitcoin's and litecoin's.
My intention is to use this blog as a base whereby as a community we can educate each other, and when/if necessary provide my tax knowledge to help fellow crypto-currency users. By all means if I make a mistake or am ignorant of any information, please correct me and educate me, as this is how we learn!
I will be giving real life examples of potential scenarios throughout this blog. Initially, I will cover the VAT aspects of crypto currencies, and at a later date edit and update this blog covering Income Tax, Capital Gains Tax and Corporation Tax.
How I came into the world of crypto currencies
I first heard of Bitcoins, and Litecoins from my brother (the founder and CEO of Alpha Technology) early in 2013, and had no idea how they worked and had minimal understanding of them.
As a student of tax I was eager to gain knowledge on the tax rules surrounding this. I did contact HMRC and some notable tax specialists at the time requesting information on the tax treatment of various crypto currency transactions and businesses involved in this area.
From my conversations with HMRC at the time it seemed as if they were unsure how the whole thing works, which is understandable considering how new this phenomena is.
The vast majority of Tax Specialists and Accountants had not even heard of crypto-currencies at the time and even now, the first time I mention bitcoins or litecoins to my Accountant friends, the vast majority of them are like " bit what???
".
I must be honest, when I first heard of crypto currencies, I thought of it as a game for “tech geeks” and thought it’d die away eventually. I could not contemplate, how something so virtual could hold value and operate in a real life economic ecosystem. How wrong my assumptions are proving to be!
Even today (28/05/2014), apart from briefing notes which have been issued from HMRC and the different interpretations of these notes from different tax experts, I believe (correct me if I am wrong) there is nothing which is “Law” relating to the tax treatment of crypto currency related activities in the UK.
As a result of this, I feel there will be ambiguity and uncertainty towards the tax treatment of different crypto-currency activities, UNTIL these rules are introduced into an act within tax legislation and when there is sufficient case law dealing with different crypto-situations.
Before I get cracking with explaining some of the VAT treatments of transactions related to crypto-currencies.
I'd like every single UK crypto currency miner or trader to refer to this link:- http://www.hmrc.gov.uk/briefs/vat/brief0914.htm. These are the briefing notes which were issued by HMRC (which I was referring to above), and I believe in the UK this is ALL we have at the moment as Tax Advisers and Accountants to work from, from HMRC. VAT (Value Added Tax)
Mining of crypto-currencies:-
HMRC have made it pretty clear that any type of business activities relating to the mining of crypto-currencies is EXEMPT from UK VAT and therefore outside the scope of UK VAT.Incorrect their Mr Tax super guy. They never said business activities. They only said bitcoin related activities. These activities can be done by businesses AND individuals. In fact several times int eh brief the HMRC identifies individuals.
A very simple example:
Mr X operates a mining
business. He mines 20 BTC in a tax year. He purchases mining equipment worth £500 + VAT. He incurs expenses of £1000 + VAT.
Being exempt and outside the scope of VAT means that NO output VAT will be due on the 20 BTC, and an important point to note is that No Input VAT would be reclaimable either.
This activity is NOT zero rated (it is specifically stated as exempt)which means it is outside the scope of VAT and you cannot just register your
business for VAT in order to reclaim VAT on the expenses.
Please also note, if you are carrying out taxable activities alongside the exempt mining activities (i.e. you carry out exempt and taxable activities at the same time), there may be scope for recovering some input VAT provided certain tests are met, which are detailed in Reg 105A SI 1995/2518. I will not go into detail as to how this would work, however please seek advice from your tax adviser, if you feel you may fall into this category.
Exchange of Crypto-Currency to Pounds:-
Again, this is outside the scope of UK VAT and an exempt activity.
A simple example:
Mr Y, a speculative trader bought 100 Litecoins in May 2013 for £500 and sold these in December 2013 for £1000.
The above example would be outside the scope of VAT and have no VAT implications whatsoever.
Goods and Services sold in Exchange for Crypto-currency:-
If you are selling (taxable) goods or services and accepting Bitcoins as a method of payment, VAT is accounted for at the point the transaction takes place.
A simple example:
XYZ Ltd, advertise and sell Bitcoin Miners on their website and accept Bitcoins as a method of payment. Item goes on sale for £1200 (incl VAT), the date of sale 1 BTC is valued at £1200.
You would be liable to output VAT of £200 (£1200/6) on this transaction regardless of the movement in the exchange rate following that, as at the point where the sale took place the value of bitcoin was £1200.
Update 30/05/2014
Income Tax and Capital Gains Tax Implications of Cryptocurrency Mining
Before I get onto other areas of cryptocurrency related activities, I thought I'd take some time to describe the income tax and capital gains tax treatment specifically of cryptocurrency mining. Which I am sure is the area most of you would be interested in.
In terms of the information supplied by HMRC,
there is very little on how bitcoin mining would exactly be taxed, so there is scope for different interpretations and different treatments by different individuals and their tax advisers.
However, the IRS has issued quite specific guidelines on how bitcoin mining activities should be treated for tax purposes. After communication with some tax advisers who deal with client's who do mine bitcoins, it seems most of them are following suit of the IRS. The general consensus was that HMRC will issue guidelines similar to those of IRS soon, in relation to bitcoin mining activities.
Oh really so what did the IRS say? You only vaugly tell us. But the reality is that the IRS did NOT explicitly specifc mining as a buinsess ONLY related activity. They only said IF you are a business wanted to get into mining.
Miners
Miners that produce their own bitcoins are now subject to two different tax charges. They must include the fair market value of the virtual currency on the day that it is mined into their gross income.
Another stipulation in the IRS guidance is that capital gains are due on the sale of bitcoins viewed as a capital asset. The taxpayer must take this fair market value on the date of acquisition as the basis price for the coins. Capital gains will be due on the difference between that basis price and the eventual sale price.
This means that if and when they sell the bitcoins that they have mined, they will have to pay capital gains tax on any profit that they have made while owning them. Furthermore, if an individual mines bitcoin as a business, the net earnings from that business will be treated as self-employment income, and will be subject to self-employment tax.
You see that.
IF an INDIVIDUAL wants to mine bitcoin as a business.
Your entire house of cards is built on some guess work you made from a half ass reading of US IRS guidelines that say exactly opposite of what you said!!!!!!
An interesting read which I came across;
http://mobile.reuters.com/article/idUSBREA2O1LR20140325?irpc=932I thought the best way to describe how this would actually work would be by crunching some numbers and explaining it via a simple example;
Tom mines 1000 bitcoins from home in the tax year 2013/14 (6th April 2013- 5th April 2014).
At the date's the first 800 bitcoins were mined/created, the market value of bitcoin was £500 per bitcoin.
At the date's the last 200 bitcoins were mined/created the market value of bitcoin was £300 per bitcoin.
The
business expenses relating to mining activities incurred by Tom in 13/14 were as follows :
- He bought miners for £50000
- Use of Home (including electric etc) was £42000
- He travelled 10000 miles on business to purchase parts for his miner, and attend bitcoin conferences etc. Giving him an £4500 allowable mileage expense.
- Print, Postage, Stationery, Sundry, Telephone, Internet etc (P. P. S. S) totalled up to £1592
- Accountancy Fees £2500
At 5th April 2014 (last day of the tax year), Tom is still holding these coins.
His income and expenditure account would look as follows, and he would be charged to income tax as follows :
Gross Income 460,000
((500*800)+(300*200))
Less Expenses
Use of Home 42000
Travel 4500
P.P.S.S 1592
Accountancy 2500
Total Expenses (50,592)
................
Net Income 409,408
Capital Allowances (50,000)
(100% AIA Claim)
.............
Taxable Income 359,408
.............
In the tax year 13/14, Tom would be liable to pay income tax on a profit of £359,408.
Taking this example further
In the tax year 2014 /15, Tom decides to sell all 1000 of his bitcoins for £500,000.
He sells through a 3rd party website which charges him a fees of £1000.
He will now be liable to Capital Gains Tax on this sale as follows :
Gross Proceeds 500,000
Incidental Disposal Costs (1,000)
............
Net proceeds 499,000
Amount Charged to IT (359,408)
...............
Chargeable Gain 139,592
..............
At this stage, a further capital gains tax charge would be due on the gain of 139,592 before taking into consideration the annual exemption.
Please note that with capital gains tax there is some scope for tax planning opportunities. For example, before disposal gifting some bitcoins to your spouse in a NIL Gain NIL Loss transfer in order to utilise his or her annual exemption. I will not go into detail with how this works, however please seek advise from your tax adviser before selling any mined bitcoins.
Concluding Comments:
Please note my above example was a very simple hypothetical situation and the figures and categories for expenses and valuations of bitcoins have no reflection to a real life situation. In reality it would be much more complex, my aim was only to provide you with an overview of how the income tax and capital gains tax situation would work.
Please note I've made reference to AIA (Annual Investment Allowance), calculated a mileage rate and given a figure for 'use of home' expense. Please contact your tax adviser if you would like further information about how these figures are calculated.
Unfortunately, you do have to keep track of the value of each bitcoin/litecoin/dogecoin at the point it is mined in order to calculate your gross income for income tax purposes (this can be a tedious task - however this can easily be done at the year end using a website which gives historic cryptocurrency rates and tallying it up against your bitcoin or litecoin wallets).
I would also like to highlight that when you do sell your cryptocurrencies you do get relief for the amount that had already been charged to income tax
I hope this working example gives you guys a good idea of how cryptocurrency mining activities are taxed now. Your comments would be appreciated.
M J Akram (AAIA, ACCA)
Accounts Manager & Tax Geek
Disclaimer
The information on this blog should not be used in any actual transaction without the advice and guidance of your own professional tax adviser who is familiar with all the relevant facts.
Although the information contained here is presented in good faith and believed to be correct, it is general in nature and is not intended as tax advice.
Furthermore, the information contained herein may not be applicable to or suitable for the individuals' specific circumstances or needs and may require consideration of other matters. All information is only relevant to UK Tax Laws.
« Last Edit: May 30, 2014, 12:53:15 PM by mjakram »
Logged
Likes fanfare, TheDoctor, Mubasher Akram, diego1000 and Fiaz Malik like this
