Ten things you need to know about Bitcoin

1. What is Bitcoin?

Bitcoin is a virtual currency largely existing online so you cannot hold coins or notes denominated in it.  Whilst this may seem unusual, many transactions are undertaken without the physical presence of currency, such as using credit cards.

2. How do I obtain Bitcoins?

Exchange facilities exist for parties to trade Bitcoin with recognised currencies and Bitcoin can also be obtained by “mining” new Bitcoins through complex computer processes.

3. Do I need to tell HMRC if I have been mining Bitcoins?

If the coins are being mined with a view to selling at a profit this will constitute a trade and the business will need to be registered with HM Revenue & Customs (HMRC).  Otherwise, if the intention is to hold the coins as a long term investment it will only be necessary to advise HMRC if there is a capital gain or loss on investment.

4. Is investing in Bitcoin classed as gambling?

This will need to be assessed on a case by case basis to determine whether you are speculating on the value of the coins or holding as a long term investment. Gambling wins are not taxable and gambling losses cannot be offset against other taxable profits.

5. Do I have to tell HMRC if I use Bitcoins to buy goods or services?

If Bitcoins are used as payment this is treated as a disposal of the currency so you may need to disclose as a capital gain or loss.

6. Do I have to tell HMRC if I receive Bitcoins in return for goods or services?

There is no specific reporting requirement but the value of the Bitcoins received will form part of the business turnover.

7. Is VAT payable on Bitcoins?

Income received from mining activities is outside the scope of VAT. VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin.

8. What records do I need to keep?

Bitcoin traders must keep good records in order to calculate the exchange rates for each trade.

9. Does the value of Bitcoins affect my eligibility for benefits or credits?

Bitcoins will count as savings or investments so could affect the eligibility for state benefits.

10. Can my family inherit Bitcoins?

Yes, but it will need to be necessary to put in place plans for the heirs to access and track down the currency. The value will also form part of the estate for inheritance tax purposes.