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Crypto taxation: What business leaders need to know

(Image credit: Image Credit: Make-Someones-Day / Pixabay)

The future of cryptocurrencies may be uncertain in some people’s eyes, but its influence is now being felt by businesses and in commerce. Major companies, including PayPal, Expedia and Subway, are already accepting Bitcoin, and smaller businesses are following suit.

There are many compelling reasons to accept digital currencies. Cheap and borderless near-instant transactions enable customers all over the world to purchase a company's services or products. Transaction fees are near zero. Accepting cryptocurrency can also help businesses attract a younger demographic of customers and clients who prefer the simplicity and pseudoanonymity of crypto transactions.

But there is a significant barrier for businesses who might be interested in accepting, holding and exchanging cryptocurrencies: the UK’s murky tax situation. The UK was one of the first European countries to issue tax guidance on Bitcoin and other digital currencies in 2014. But since then, it has lagged behind European neighbours.

Many businesses in the UK are open to using cryptocurrencies but the confusion around tax responsibilities is enough to put them off.

Home and abroad

Companies with international reach have an even tougher job keeping up with the varying regulations and their implications. The laws in the US, for example, are as vague as the UK’s. There’s a dearth of comprehensive guidance from the Internal Revenue Service (IRS) for businesses earning gains on cryptocurrency investments or transactions.

The IRS released guidance in 2014 that states virtual currency is to be treated as property for tax purposes. This stands at odds with the position taken by its UK counterpart, where cryptocurrency is treated more akin to currency when accepted as payment for goods or services. This means such transactions will be subject to VAT taxes in the standard fashion.

According to the HMRC, “The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.” What this means is that businesses who purchase goods with cryptocurrency after it has gained value are likely to pay full taxes on its current value, not on its value when originally purchased.

No VAT payments are required when exchanging one form of cryptocurrency for another or for any mining activity.

It’s not what you have, it’s how you use it

The fundamental position in HMRC’s guidance for cryptocurrency taxation is that what is done with the assets dictates the tax treatment. The specific type of asset doesn’t determine the liability.

It’s also worth noting that HMRC’s 2014 guidance referred to Bitcoin specifically. Smaller types of crypto may not be subject to these rules. In short, this is an emerging area of taxation and cases turn on their own facts.

That said, here are some rules we can be relatively certain on:

  • VAT should be paid when using Bitcoin (and probably other digital currencies) to carry out transactions in return for goods and services.
  • No VAT should be paid on the trading of crypto in exchange for other currencies.
  • Any profit or losses made during exchange of currencies should be taxable based on foreign exchange rules, recorded into accounts, and applied under normal corporation tax.
  • Any crypto profits and losses for a non-incorporated business should be recorded into accounts, with income tax applied.
  • Any crypto profit or loss incurred is subject to corporation tax

Investing in crypto

Of course, many businesses are also involved in investing and trading crypto. The nature of these dealings is an important tax consideration. Whether the business is an active or passive investor is important as the potential tax liability is significantly different. As a guide, a purchase of a few coins you hang on to is the action of a passive investor. Buying several different coins and selling them is the action of an active, trading investor.

Advice from advisors

Because HMRC considers each situation on a case by case basis, tax advisors must do the same while being guided by the aim of helping your business avoid a tax bill some time down the line. Sadly, a large proportion of accountants and tax advisors know little about the crypto landscape and prefer to steer clear of advising.

Inadequate tools

Amidst all the vagaries of crypto tax, businesses face another obstacle – working out crypto gains and losses. They lack both the accounting tools and the crypto-specific accounting knowledge. This leads to the cobbling together of inaccurate figures, or even failing to report altogether.

Unlike other traditional assets, cryptocurrencies are known for their volatility which makes it much harder to manually factor in the value of each incoming Bitcoin and the increase or decrease in its price over a period of time.

Conventional bookkeeping products and services are no good for calculating the gains and losses incurred by digital currency transactions and holdings. Spreadsheets simply don’t cut it, especially with hundreds of trades to account for (often by accounting teams with limited experience of the crypto environment). But the right software is designed to track and make cost-basis calculations by directly pulling the transaction-related information from the blockchain. The processed calculations are then added to tax forms, making it easier to file returns.

Shades of grey

No matter how accomplished a piece of crypto-specific taxation software is, the vagaries in the law remain. As providers of a crypto tax software solution, my company has been forced to approach the many grey areas of tax laws with a focus on reasonableness, defensibility, and consistency.

Although not explicitly spelled out in the guidelines, specific identification of each piece of digital asset received should be tracked from receipt to disposition as it is moved from wallet-to-wallet or from exchange-to-exchange. Crypto-specific software capable of specific identification is the only way to irrefutably account for income, gains, and losses that may be independently verified by auditors. This is key for businesses – the surefire way to maintain a defendable position.

In all commercial transactions the focus of laws should be certainty. Unfortunately, certainty is lacking when its comes to the UK’s cryptocurrency taxes. And let’s be honest, in this fast-moving world of digital currencies, it might be a long time before any significant degree of clarity arrives. Until it does, the right accountancy software will keep businesses on track for compliance.

Sean Ryan, Perry Woodin, Founders, NODE 40
Image Credit: Make-Someones-Day / Pixabay