Do you have to pay VAT on crypto-funded transactions?

Since VAT was first introduced in France in the 1950s, and in the UK in 1973, it’s undergone a number of changes. There have always been areas of confusion and uncertainty about how to apply VAT. Tax laws keep having to be clarified and altered in order to keep up with the way that we shop and do business, like the famous lawsuit over whether Jaffa cakes are a cake or a snack.

Today, there’s a new upcoming issue that’s causing a lot of discussion among tax lawyers and tax authorities: that of crypto-currencies, new currencies that are based on blockchain technology and secured by cryptography. Although Bitcoin is the most well-known, there are about half a dozen cryptocurrencies which are used for online transactions. Cryptocurrencies are decentralised, which means that they aren’t controlled by any single bank or central authority, and can be sent directly between two parties using private and public keys.

The rising adoption of cryptocurrencies

Cryptocurrencies are truly global currency that transcends all borders, languages, and currency zones. The blockchain technology which forms their foundation makes them extremely secure, since transactions made using blockchain create a paper trail that is almost impossible to alter or erase. As a result, cryptocurrencies are virtually non-counterfeitable.

This has led to a huge rise in popularity for cryptocurrencies, especially in industries that rely on a trustworthy paper trail. For example, the diamond industry depends wholly on the ability to track the path taken by each stone. A number of new solutions make use of blockchain to secure a transparent supply chain for each stone, from mine to the consumer. Walmart in the US has leveraged blockchain in a similar way to increase transparency in their food supply chain and reduce incidences of tainted food.

The cryptocurrency taxation conundrum

The rising popularity of cryptocurrencies has raised a new question for tax authorities: are crypto-funded transactions liable for VAT?

The method of payment feels different, and the currency doesn’t go through a central bank or government regulator, making it difficult for governments or tax authorities to control them. At least for the moment, it’s preferable for people and businesses to keep transactions funded by cryptocurrency under the radar of the HMRC and other global tax authorities, creating a serious challenge around enforcing the processing and payment of VAT.

One issue is working out the value of cryptocurrencies. Their decentralised and global nature means that there’s never any single exchange rate for Bitcoin or other cryptocurrency into the tax authorities’ local currency. This creates a great deal of confusion about how to calculate the amount of VAT payable on any transaction.

Additionally, sometimes new cryptocurrencies form out of existing ones, in what’s called a ‘hard fork’, which makes it necessary to pinpoint when you could say that the new currency diverged from the old one, and what the exchange rate is between them.

Different approaches to cryptocurrencies and VAT

For these and many more reasons, the vast majority of tax authorities around the world still haven’t clarified how to tax crypto-funded transactions. For the moment, most countries are taking a hands-off approach to VAT. Belarus, Germany, Portugal, and Singapore are among those that have decided to exempt transactions made using cryptocurrency from VAT, regardless of the size of the transaction.

In contrast, other tax jurisdictions like China, India, and Japan decided to go in a different direction and heavily discourage, or even outlaw, the use of cryptocurrencies for trading purposes.

In the US, tax authorities approach cryptocurrencies as a financial asset in every way, and are clamping down on what they perceive as crypto tax evasion. A few months ago, the IRS won a case forcing a cryptocurrency exchange to share the accounts of over 13,000 customers, so that the tax authorities could identify tax evaders. Research shows that only 53% of Americans who use cryptocurrency are genuinely reporting their taxable transactions. The IRS is also looking into other ways to discover people who’ve used cryptocurrencies for transactions or trading, and check their tax records.

To keep on top of all the changes in filing successful VAT returns for crypto-funded and any other transactions in the EU and other countries around the world, download our eBook.

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