Cryptocurrency Tax Status
On December 15, 2017, the European Council and the European Parliament finally agreed the 5th AML (Anti Money Laundering) Directive. This directive contains the first legally binding definition of virtual currencies and is the most significant regulatory action over virtual currencies anywhere in the world.
Because of a Swedish ruling a couple of years ago, upheld by the ECJ ( European Court of Justice) recently, virtual currency transactions are exempt from VAT according to the current EU laws and regulations. The binding force of case law of the ECJ is recognized without objection by all EU member states & courts i.e. virtual currencies are exempt from VAT across all jurisdictions of EU member states. At present UK does not recognise cryptos as either currency or commodity. It is certain the UK authorities will make a determination at some point in the future.
The UK leads in Fintech innovation, as the place to be for financial entrepreneurs; however, cryptocurrency regulation in the UK is behind others. All issuance of equity and debt are regulated by the FCA (Financial Conduct Authority) whose aim is seamless operation of financial markets, by providing protection for consumers and investors, plus promoting effective competition in markets. The FCA maintains that:
“cryptoassets designed primarily as a means of payment or exchange do not sit within the scope of FCA authority.”
While SEC and CFTC engage in crypto market regulation in the U.S, virtual currencies are mostly unregulated in the UK. The FCA doesn’t consider virtual currencies to be currencies or commodities under the MiFID II (markets in financial instruments directive) and, therefore, has no jurisdiction over them. It has authority over activities related to virtual currency derivatives such as bitcoin futures, options, or crypto-linked ETFs (if approved). The FCA’s position is ambivalent. On the one hand, the FCA never explicitly declared authority over security offerings in the form of ICOs/STOs, but on the other, it issues consumer warnings describing ICOs as “very-high-risk speculative investments” and unhelpful statements such as “Whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided case by case.” Difficult to navigate that one…
Regulatory Authorities in the UK intend to apply AML regulations in order to comply with the EU’s 5th AML Directive. Along the same lines, the Treasury has revealed their intentions to regulate cryptocurrency traders, requiring them to abide by KYC (Know Your Customer) regulations and disclose their identities as well as report suspicious activities.
UK Tax with regard to virtual currencies
On tax though the UK is ahead of the game. In 2014, HMRC published guidance regarding the tax treatment of virtual currencies. The UK was one of, if not the first to have a clear legal position on the issue – albeit “for tax purposes only.” HMRC guidelines clarify that:
(i) mining income is not subject to VAT,
(ii) any loss or gain arising from the holding and/or selling of virtual currencies will be treated in the same way as gains made in other commodities or currencies,
(iii) virtual currencies acquired and held for personal reasons instead of speculative purposes will probably not be subject to capital gains tax.
You can compare this with buying a painting and sticking it on your wall rather than popping it into Sothebys. The UK authorities are under pressure to produce a comprehensive strategy on virtual currencies as soon as possible. Other EU countries are currently ahead in legislative support. Theresa May has suggested the UK might follow South Korea in banning anonymous trading and regulating exchanges.
Scotcoin leading the way on digital currency legislation
#We at Scotcoin are well ahead on all these matters. On a related note, the World Bank sees the further enhanced development of blockchain as fundamental to cryptocurrency development