What are the tax implications of Bitcoin for businesses?

Faith in the traditional banking system has waned and the doors are opening to new entrants. Anyone can be a banker now. In fact, anyone can be a central banker and create their own money or, rather, mine it, like gold. This is crypto-currency or secret currency, of which Bitcoin is the best-known example.

Reminiscent of the ’49 California gold rush, the giants of Silicon Valley are piling in. What’s not to like? Low transaction fees, no FX, no banker-of-last-resort, no deposit insurance scheme, no Financial Ombudsman.

In fact, it’s not money; it’s a commodity. The US Department of Justice has declared it to be ‘goods’. Paying with Bitcoin is not paying with money. It is barter: offering goods for goods.

But what are the implications?

Should VAT be added to a Bitcoin payment you are making if you are VAT-registered? Since Bitcoin is secret, do you even know who you are trading with, what VAT should be added or what you put in your EU Sales List?

Should payments made with Bitcoin be added to ‘Cost of Goods Sold’ or payments received added to ‘Sales’? What is the treatment if the value of Bitcoin owned rises or falls? Are such profits taxable and any losses tax-deductible?

These are some important questions, but ones that can get lost in the rush to innovation – small businesses really do not want to get caught out. Similarly, why can Bitcoin be termed an ‘investment’ when the exchanges on which it is traded are unregulated and their location, staffing, ownership and accounts may be invisible? Who is the market-maker in the goods and how can you be sure you can get your value out in real money when you want it? Bitcoin may appear attractive when deposit rates are 0% but the business propositions, security and safety nets are very different.

With crypto-currencies it’s as Tina Turner once said in the 1985 film Mad Max 3: Beyond Thunderdome: “I know you won’t break the rules, because there aren’t any”.

By Robert Lyddon, General Secretary, IBOS Association

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