Bitcoin Payments Are Subject to UK Income Tax | International Tax News

On December 19, 2018, the UK officials confirmed that bitcoin payments received by UK tax residents will be subject to UK taxation. The HMRC is now clear: digital currency is not a currency or money.

The exact purpose of a bitcoin transaction seems to determine the exact tax treatment of it. For example, if you just own cryptocurrency like bitcoin that you later sell, then the bitcoin is treated as an investment asset; any subject such bitcoin payments will be subject to the UK capital gain taxes. Similarly, if you mine bitcoins on an occasional basis, then it is also taxed as a capital gain.

However, if the mining of bitcoins rises to the level of doing business, then it would be treated as income gains as part of a financial trade and subject to ordinary income taxation.

Moreover, if a UK employee receives Bitcoin payments from his employer, these payments will be subject to UK payroll taxes. The amount to be taxed will be based on the “best reasonable estimate” of the value received. It also appears that the employer may need to recognize a capital gain in certain situations.

The most interesting guidance appears to be with respect to bitcoins received and given away for free as well as stolen bitcoins. If a bitcoin received for free (rather than received a payment for a service), then it may actually be tax free. It is not clear what the cost-basis would be in such a bitcoin.

Stolen bitcoins do not appear to produce any tax consequences, because, paradoxically, HMRC appears to consider such bitcoins as still owned by the same taxpayers. If a taxpayer forgets his password needed to access his bitcoins, however, he may be able to claim a loss if he persuades HMRC that he will never remember the password. It is not clear at all how the taxpayer would be able to do so.

The recent HMRC guidance concerning bitcoin payments is highly important and seems to be mostly aligned with that of the IRS in the United States. Sherayzen Law Office advises its clients on the US tax consequences of bitcoin transactions. Contact Us Today to Schedule a Confidential Consultation!

Italian & French Digital Services Tax | Cryptocurrency Tax Lawyer

As the EU talks on the single digital services tax have stalled, some major individual-member countries have moved to impose one independently in their own jurisdictions. On December 17 and 20, 2018, France and Italy announced their plans to impose their national digital services taxes. Spain and the United Kingdom already stated that they will do the same, but they have yet to announce the final proposals.

France took the lead with the imposition of a 3% digital services tax on all revenue derived from digital activities starting January 1, 2019. The tax will target only large multinational companies with large global annual revenues, commonly known as “GAFA” in France (Google, Apple, Facebook, Amazon). France believes that, through sophisticated tax planning, these companies have been able to escape much of the local taxation; the new tax will assure that they will start paying more to French tax authorities. The tax is expected to generate €500 million of additional revenue in 2019.

Italy also desires to impose in 2019 a 3% digital services tax that will target specifically online advertising, big data and peer-to-peer marketplaces. The Italians believe that their digital services tax will generate €600 million per year. The proposed law will be payable by all Internet companies with over €750 million in revenue and €5.5 million of “eligible” Italian earnings. Nonresident companies who have no physical presence in Italy will need to register with the Italian tax authorities in order to pay the required tax.

The Italian legislative process is slower than that of France and it is unlikely that the tax will be imposed on January 1, 2019. Usually, once the new law passes, the Italian finance ministry will need to publish it with all details within four months after the passage of the law; then, it will be another two months before the new law will become effective. Still, there is little double that this law may be imposed sometime in the second half of 2019.

While the need for revenue that drives these new national laws is understandable, there is a danger for such piecemeal approach to taxation of digital services in the European Union. As Mr. Pierre Moscovici (the EU Commissioner for Economic and Financial Affairs) already noted, the differences between these national tax laws may produce serious impediments to the free movement of online goods and services in the European Union.

On the other hand, the prospects for a unified European digital services tax are quite dim due to the adamant opposition to such law from many member-countries, especially Ireland and Sweden. Given this impasse, the national governments that desire to benefit from taxation of online services do not have any other effective remedy but to do it independently within their own jurisdictions.

Bitcoin is Property Under Israeli Tax Law | Cryptocurrency Tax Lawyer

On February 19, 2018, the Israel Tax Authority (“ITA”) stated in a circular to tax professionals that cryptocurrencies, such as bitcoin, are property under Israeli tax law. This view brings the Israeli tax law very much in line with the IRS position in the United States.

Cryptocurrency is Property under Israeli Tax Law and Subject to Israeli Taxation

After years of vacillation, the ITA took the hard stance and stated that virtual currencies should be treated as intangible assets. This is a position very similar to the IRS in the United States, which declared in March of 2014 that it will consider and tax cryptocurrencies as property.

The ITA position leads to the logical conclusion that any income generated by these assets (including from the sale of cryptocurrencies) will be subject to Israeli taxation. The exact level of taxation will depend on whether a taxpayer is engaged in a business activity.

Cryptocurrency as a Non-Business Property under Israeli Tax Law

If a taxpayer’s activities do not rise to the level where a taxpayer would be considered as carrying on a business, he will not be subject to the Value Added Tax (“VAT”). This individual, however, will still have to pay the Capital Gains Tax (“CGT”) on any gains from the sale of bitcoins and other cryptocurrencies. The current CGT rate in Israel for individuals is 25%.

On the other hand, it appears that capital losses incurred by investors in crytocurrencies (a topic of special relevance today in light of the recent huge drop in the value of bitcoins) can be used to offset any capital gains. Furthermore, these losses can be carried forward to future tax years.

Cryptocurrency as a Business Property under Israeli Tax Law

It gets a lot worse for businesses. First of all, the “mining” of virtual currencies (this is process of solving algorithms to create a new unit of a virtual currency) will be generally subject to 17% VAT. The VAT is imposed only on the mining itself; it appears that the trades thereafter will not be subject to VAT.

Second, any taxpayer engaged in the business of trading virtual currencies will be classified as a financial institution for the VAT purposes.

Finally, businesses that conduct transactions with virtual currencies should report them on their business tax returns. Any capital gains generated by cryptocurrencies will generally require businesses to pay the CGT up to the maximum rate of 47%.

ITA Circular on Cryptocurrencies as Property Under Israeli Tax Law Can Be Challenged in Court

It should be kept in mind that the circular issued by the ITA represents only the ITA’s position on cryptocurrencies as property under Israeli tax law. This circular is not the final law and it can be challenged in courts.

Contact Sherayzen Law Office for Help with US Tax Planning and Tax Compliance Concerning Ownership of Cryptocurrencies

If you are a US taxpayer who owns or deals with cryptocurrencies, you may have a significant exposure to US taxation.   If you would like to find out more about US taxation of cryptocurrencies, contact Sherayzen Law Office to schedule a confidential consultation.