U.K. in Race to Rewrite Cryptocurrency Tax Rules

Four years ago, the U.K. became one of the first European countries to issue tax guidance on bitcoin and other digital currencies.

But today the U.K. is playing catch-up on tax policy with the likes of France and Germany, following the explosion in the valuation of digital currencies over the past 18 months.

As of Aug. 14, the total market cap of the 100 biggest cryptocurrencies is $193.8 billion, according to data provider CoinMarketCap.

The price of the most well known digital currency, bitcoin swelled more than 1,861 percent in 2017, and then fell sharply in 2018. And even after plunging 55 percent this year, bitcoin maintains a market capitalization of $111.5 billion.

The amount of money now residing in cryptocurrencies and the number of new entrants into the fast-growing sector have pushed countries around the world to speed up their rule-making. Germany, France, and Italy are all in various stages of producing their own take on tax treatments for the emerging sector.

And the pressure is on, as the U.K. seeks to re-examine its treatment of cryptocurrency to produce a more favorable tax regime to attract digital currency investors.

A Global Focus

Germany’s lower house of parliament confirmed in June it has two separate positions on when a digital currency becomes taxable. Any income made from buying and selling tokens is subject to income tax. But when the digital currency is used as a means of payment, or when it’s exchanged or sold, it will be exempt from Germany’s 19 percent VAT.

In April, the French the government slashed fees on cryptocurrency assets to 19 percent from 45 percent after it reclassified the capital gains as movable property. The move followed challenges by several cryptocurrency investors who argued that the treatment applied by the French tax authority since July 2014 was inappropriate.

Meanwhile, in 2018 Italy completed a consultation on its proposed plans to regulate digital currency exchanges that operate in Italy. The plans, could mean that Italy is better able to tax cyrptocurrency activities and combat illegal activities involving cryptocurrency exchanges.

The vast fluctuations in the value of the digital tokens, and the array of approaches tax authorities have taken to regulating the industry point to the challenges facing the U.K. as it looks closer.

Coming Together

The U.K. government held its first cryptocurrency task force meeting in May. The group is made up of senior officials and financial regulators, including Katharine Braddick, director general of financial services at the Treasury; Andrew Bailey, chief executive of the finance watchdog, the Financial Conduct Authority (FCA); and Dave Ramsden, deputy governor of the Bank of England.

It subsequently held a roundtable discussion in July, where the task force met with market participants, including accounting firms and exchanges. The task force will publish a report of its finding in the third quarter of the year.

David Raw, the Treasury’s deputy director for banking and credit, said the government won’t “stifle innovation” in comments at a July Treasury Select Committee meeting.

“Quite a lot of countries around the world are in that same place of trying to understand the benefits and the risks, map out precisely where the regulatory perimeter is and make recommendations for next steps,” he said.

Obi Nwosu, CEO of Coinfloor, a cryptocurrency exchange, said the U.K. could be a “leading player” in the industry with sufficient regulation.

“The lack of regulation is one of the things presenting it getting a mature stage, there are a number of institutional players that would like to get into the market, but they can only deal with other regulated institutions,” Nwosu said at a Treasury Select Committee meeting in June.

Other Approaches

The U.K. government has in recent years taken a wait and see approach said Malcolm Campbell-Verduyn, editor of ‘Bitcoin and Beyond: Cryptocurrencies, Blockchains, and Global Governance’ (RIPE Series in Global Political Economy).

“I think UK policymakers are waiting to see how other countries fare in taxing cryptocurrencies whilst seeking to maintain the perception of the UK as a more light touch fiscal and regulatory regime for blockchain experiments in its fintech ‘regulatory sandbox’,” he explained, adding “the ‘wait-and-see’ approach might also suit UK policymakers concerned more with how Brexit will play out exactly.”

Tom Shave, a London-based partner at accounting firm Smith & Williamson argued that this method could prove beneficial for the U.K. as rules are refined to reflect the market.

“If you look at other jurisdictions that have released guidance already, like with a lot of things that are new, those that go early then have to re-work it, and the U.K. has a good reputation relatively with financial services of letting things evolve and then adapting the guidance to those changes,” he said.