Moves are afoot by governments around the world to declare the controversial virtual currency Bitcoin as an investment rather than money.
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The shift in focus would leave Bitcoin traders open to paying tax on any capital gains made from profits in buying and selling.
HM Revenue & Customs (HMRC) has put UK-based traders on notice that a review of the currency’s status is underway.
Bitcoin is undergoing a similar investigation by the Internal Revenue Service (IRS) in America and Singapore has already released guidance detailing how the government intends to levy tax on gains from trades.
The simultaneous action across the globe suggests governments have come to an agreement about how to approach Bitcoin investments and are starting to implement the decision.
Criminal concerns
Bitcoin is a virtual currency that only exists in an encrypted digital format online.
Germany is one of a handful of nations that will allow Bitcoin traders to convert their holdings into hard cash as euros through banks.
The tax approach was triggered by concerns that Bitcoin is used for money-laundering, terrorism and other criminal activities, especially drug and arms trading.
In response to the HMRC approach, Bitcoin traders in the UK have called for VAT on buying and selling to be abolished and threatened to move offshore to avoid taxation.
Bitcoin is an independent commodity which is outside of the control of central banks and governments.
Holdings have risen in value from £150 million to an estimated $10 billion worldwide in a year.
Bitcoin hoard seized
HMRC said no final decision on whether to tax Bitcoin transactions had been made, but the government will stop short of giving the commodity currency status.
“We have had talks with stakeholders but this is complicated and we will continue to listen to arguments for alternative tax treatments under existing laws,” said a spokesman.
Many traders argue that once VAT at 20% is paid on a trade, they are left with little or no profit from a transaction.
Around 12 million Bitcoin are held by traders. Valuations vary widely. At times Bitcoin have been worth anything from 30 US cents to US$32 each.
Traders generate more Bitcoin by trading, but the software managing the commodity is capped at producing 21 million.
US law enforcement agencies have seized almost 30,000 Bitcoin in the past few days from The Silk Road, an online community accused of acting as a front for drugs gangs and computer hackers. Another 145,000 Bitcoin was also identified, but lawyers and the US government are battling over who should control the hoard.
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