Bitcoin Tax Headache Goes Before A Court

Virtual cryptocurrencies like Bitcoin are causing a headache for tax authorities around the world.

While the uptake on virtual currencies is slowly but surely creeping ahead, governments are looking at ways to exert some control over the money tied up in the online transfers.

Bitcoin is not controlled by any central bank or government, so is free from external interference on payments or transfers.

However, governments see taxing exchanges and merchants dabbling with Bitcoin as a way to snatch back some independence from Bitcoin spenders.

One key move is Sweden’s referral for a ruling from the European Court of Justice that cryptocurrency exchanges are liable to pay VAT on any fees charges for their services.

Exchanges come under pressure

The decision – which could take up to two years to filter through the courts and back to tax authorities of the 28 nation European Union – will have a far reaching effect  on firms set up to hold and manage Bitcoin for investors.

So far, few EU countries have made any decision about taxing Bitcoin – but the UK has decided exchange services are VAT exempt, but merchants accepting Bitcoin for goods and services should add tax at the rate of 20% to each transaction.

Some other EU nations tax Bitcoin trading profits as income.

The EU decision could lead to Bitcoin exchanges fleeing Europe and setting up their bases in more tax-friendly environments where their services would be tax-exempt.

However anyone trading the virtual currency might still have to pay income tax in their home country on any profits they earn.

The issue then becomes double taxation for traders accepting virtual currency payments – not only VAT on their business but possibly a tax on exchanging the currency for local cash.

Cloud of uncertainty

Germany has tried to legislate to deal with this problem by charging capital gains tax on speculators who hold their Bitcoin for less than a year, but no tax for anyone keeping their virtual currency for more than a year.

However, the cash flow implications of tax rules along these lines are significant for businesses involved in regular Bitcoin transactions.

“The uncertainty of which way the European court will go is unsettling for European exchanges,” said Sian Jones of the UK Digital Currency Association.

“An answer to the tax question would be useful. The problem is if Bitcoin was a tangible product, the law covers how to tax it, while if Bitcoin was legal tender, other laws would cover that issue.

“Bitcoin is neither and none of the current tax rules quite cover what to do.”

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