It’s too early to tell whether Bitcoin and other cryptocurrencies will succeed, but the internet is no stranger to facilitating dramatic changes in business fortunes, so we’ll probably know soon.Meanwhile, HMRC is analysing how to tax Bitcoin transactions.The growth of Bitcoin has raised concerns about volatility and lack of transparency, and fears it could be used for tax evasion and money laundering.Video Playback Not Supported Lack of awareness of crypto currencies such as Bitcoin and concerns about fluctuations in value mean that Britain is low in the international league table for Bitcoin transactions.But until basic tax ground rules are clear, it isn’t possible to define and quantify avoidance or evasion.What is the UK tax position of Bitcoin?Currently, the UK levies VAT at 20 per cent on purchases of Bitcoins.UK-based traders have threatened to move abroad as this makes their businesses unprofitable.HMRC is considering alternative treatments on the VAT front, which could see VAT levied only on commissions charged by the cryptocurrencies’ trading exchanges.

On the direct tax side, existing rules will be used to calculate income or gains arising from cryptocurrency transactions, and calculate the tax payable.For investors in Bitcoins, the sterling equivalent of gains made in any tax year will, where exceeding the annual capital gains tax allowance of £10,900 (for 2013/14) be chargeable at 18 per cent to 28 per cent.Bitcoin miners and internet traders accepting Bitcoins for goods and services will be taxed on profits, with fluctuations in the value of the cryptocurrency reflected in the profits on which UK taxes are payable.Internet gamblers using Bitcoins should be exempt from UK taxation because HMRC doesn’t regard gambling and betting as trades.However, internet gamblers maintaining cryptocurrency stockpiles will be chargeable to UK capital gains tax on the sterling equivalent of gains in their stockpiles.For most people who are resident, ordinarily resident and UK domiciled for tax purposes, current tax rules provide a reasonably clear framework for bitcoin transactions.

For individuals not UK domiciled, the situation is less clear because of legal uncertainties about where Bitcoins are actually situated.Once the VAT position is clarified, the UK could be one of the first countries to have a coherent framework for taxing Bitcoin transactions.We then expect HMRC to mount a campaign reminding those using cryptocurrencies to declare tax liabilities.For HMRC, the secrecy of the internet may be a real problem in masking tax evasion.Will they pitch their web-bots against the cryptocurrencies’ security systems to identify regular UK-based users who might have something to declare?George Bull heads Baker Tilly’s Professional Practices Group.Share with your networkIn late 2013, the UK was not a great place to be a Bitcoin user or entrepreneur.Value-added tax (VAT) was being levied on sales of digital currencies, few retailers were even aware of its existence, and banking or funding for startups in the space was almost non-existent.Fast-forward to today and the UK is now regarded as one of the most promising places in the world to operate a Bitcoin business.

This has been largely due to the work of the Bitcoin community, as well as growing engagement by a government eager to bolster London’s current “fintech” boom and maintain the city’s status as a global financial hub.bitcoin pool algorithmLast year, the London Bitcoin Meetup grew from a few people in a pub near Paddington station, to the world’s largest regular gathering of digital currency enthusiasts.bitcoin fastest gpuIt was out of these gatherings that the UK Digital Currency Association was formed, to promote the sector and provide a single point of contact for policymakers and regulators.bitcoin nyse tickerThe culture of the UK Bitcoin community is quite different to that in many countries, with many of those involved having worked in the UK’s large financial services sector.bitcoin nasdaq symbol

This results in a pragmatic approach to promoting and increasing digital currency adoption, and the general consensus is that light-touch regulation of certain types of business should be welcomed — to legitimize the technology and to help prevent episodes such as the Moolah (dogecoin-related) debacle.litecoin generatorThis proactive mentality has led to some early successes with regulators; in April, the UK tax authorities rescinded the aforementioned VAT on digital currency sales and trading fees.pagamento bitcoin italiaWhile bitcoin retail acceptance has slowed somewhat, UK bitcoin startups held their own against their US counterparts in 2014.Blockchain.info, established in the unlikely setting of Yorkshire in the north of England, announced in October that it had raised a bitcoin-record setting $30.5 million.Bitnet, a payment processor whose team had previously sold a $2 billion payments business to Visa, established operations in Belfast and raised $14.5 million.

Elliptic launched the world’s first insured bitcoin custody service in January, later raising $2m in seed funding.Coinfloor and Netagio launched bitcoin exchanges, and two established Australian bitcoin businesses, BTC.sx and Coinjar, even moved their headquarters to London, attracted by the city’s financial pedigree and favourable tax regime.That’s not to mention the raft of new startups that launched last year, including XBTerminal (a POS system), pockio (gift cards for crypto),Queueco (automated trading platform) and Wyre (mobile payments), with many others in development.And it’s not just bitcoin.Alternative blockchain-based technologies and applications from UK-based companies such as Eris Industries and Maidsafe have the potential to facilitate smart contracts and propel all sorts of decentralized applications in the years to come.Still, all of this success belies the significant structural challenges that remain in the UK.It remains almost impossible for Bitcoin companies to obtain bank accounts, particularly if they wish to hold client deposits.

Although a widespread issue, it appears to be particularly acute in the UK, with banks citing the money laundering risk, an issue to which they are particularly sensitive since the levying of huge fines against HSBC and others.This difficulty has been exacerbated by the reluctance of the Financial Conduct Authority and other regulators to take responsibility for overseeing Bitcoin businesses.There is hope, though; Swedish exchange Safello has proven to be a recentexception to the rule, securing a UK banking relationship.The Bank of England weighed-in on crypto-currencies, releasing two detailed reports on digital currency technologies and their economic implications.In July, the London-based European Banking Authority suggested that the issue could be resolved by bringing digital currency businesses within the scope of anti-money laundering regulations.And in August, Chancellor of the Exchequer George Osborne took the politically significant step of buying bitcoins from an ATM at a fintech event in London, before announcing a government consultation on digital currencies.

The global regulatory uncertainty has created an opportunity upon which some of the UK’s Crown dependencies are capitalizing.These self-governing territories have in the past been able to carve-out lucrative niches in finance and e-gaming, thanks to their political and legal independence from the UK, and they are now looking to do the same with digital currencies.For example the Isle of Man has promised to regulate Bitcoin businesses, while Jersey has become home to GABI — the world’s first regulated Bitcoin investment vehicle.[Banking still remains an issue as Capital Treasury Services was forced to cut ties with the Isle of Man’s Bitcoin companies, and HSBC ended its relationship with the Jersey sponsor of the GABI fund.] Developments over the next year will be critical in determining the future of digital currencies in the UK and perhaps elsewhere in the world.The UK’s legal and regulatory frameworks are respected globally, and the government’s conclusions to its review of the sector (expected in the next few months) will be closely monitored and likely emulated.