Next month Bitcoin and other virtual currencies could become even more attractive to UK investors and retailers looking to accept them as payment.

Bitcoin could find its tax status changed to a ‘private money’ by the end of February as part of HMRC’s review of the tax liability of electronic currencies.

Transactions in Bitcoin are currently taxed as face-value vouchers by the HMRC, which incurs the full 20 per cent VAT on the value of the Bitcoin exchanged in the transaction, which the seller must charge to the buyer.

If rated as a ‘private money’ Bitcoin transactions would only require VAT to be paid on the commission charged by any trading exchanges when a retailer converts the virtual currency back to sterling, dramatically reducing the cost on the initial transaction.

“Whilst Europe dithers on the tax status of virtual currencies, there is an opportunity for the UK to clarify the tax risks and enable exchanges to open and flourish,” said TMF Group head of tax Richard Asquith.



“The US’ Inland Revenue Service (IRS) has not yet issued any guidance on its tax treatment for digital currencies, but the explosive growth of the currency, and therefore rising tax avoidance risks, will probably force some initial regulation early this year.”