The UK is planning to scrap VAT on the trading of digital currency Bitcoin, reports the Financial Times.

A briefing by Her Majesty's Revenue and Customs (HMRC) said it would end the 20 per cent VAT on Bitcoin transactions, adding that it would not tax margins as well.

A formal announcement is expected later in the week. HMRC is expected to rule Bitcoin will be classed as an asset or private money. The cryptocurrency is currently classified as a voucher.

However, Bitcoin will still be subject to corporation tax.

The UK Digital Currency Association (UKDCA) commented:

The briefing provides clear rules on the tax liabilities for individuals and businesses handling Bitcoin and other cryptocurrencies. The published guidelines are some of the most sophisticated and forward-thinking issued by tax authorities anywhere in the world. The briefing suggests that cryptocurrencies should be treated almost identically to other currencies, in terms of taxation. This gives further legitimacy to digital currencies and could lead to a gold rush of digital currency businesses to the UK, further cementing its status as the world's capital for innovation in financial technologies.

The virtual currency was recently dealt a serious blow by the closure of what was once the world's largest Bitcoin exchange MtGox. Last week, MtGox suspended trading, took it's website offline and erased the company's twitter account.

The exchange had reportedly lost 744,408 Bitcoin – roughly six per cent of Bitcoin circulation – due to problems with the exchange's software. On Friday, the company filed for bankruptcy protection in Tokyo.

The UK's liberal approach to Bitcoin is a stark contrast to the attitude of other European states.

In December, Norwegian authorities announced that they will be placing a tax on the virtual currency. The Norwegian tax authorities said Bitcoin would be treated as an asset that will consequently be subject to capital gains tax.

The virtual currency has also been subject to sharp criticism from European regulators. The European Banking Authority (EBA) warns that "no specific regulatory protections exist in the European Union that would protect consumers from financial losses if a platform that exchanges or holds virtual currencies fails or goes out of business."

China’s government has been even more draconian, banning financial institutions from trading in Bitcoin.

