Christian Kourtis of Gowling WLG explores how regulation and taxation could damage the popularity of existing digital currencies It is safe to say that 2017 will be the biggest yet for Bitcoin and cryptocurrencies.The attention generated by Bitcoin’s sharp increase to above the $1,000 (£800) threshold earlier in the year has led to a renewed focus on Bitcoin and cryptocurrencies in general.While the price of Bitcoin is interesting, it would be unwise to attach unwarranted significance to it.A currency in its infancy is likely to be volatile.However, when considered in the wider context, its price has consistently increased since 2014-2015 as its volume and market size has grown.In the face of wavering fiat currencies, cryptocurrencies have seen a surge in popularity – particularly in response to actions taken by governments that threaten the established, “normal” financial system.Taking the raid on Cypriot private bank accounts by the authorities as an example, Cypriots flocked to Bitcoin in response.

A similar situation occurred in Spain in anticipation of comparable actions by their national government.apple pulls bitcoinMore recently, India’s decision to demonetise aspects of its currency caused a surge in the reliance on Bitcoin and other cryptocurrencies from across India.bitcoin historical trade dataThe role Bitcoin and other cryptocurrencies have played during these recent examples of disorder in the traditional financial system provides a compelling narrative for their ongoing future role.bitcoin sgd exchange rateHowever, that is not the whole story, and with greater adoption comes the spectre of regulation and taxation, which could impact their desirability.bitcoin armory is offline

The rise of cryptocurrencies has not gone unnoticed by national governments and regulators with many actively looking at their regulations and taxation structures.bitcoin conference 2013 londonWhile Bitcoin may be the test case, any other currency with hopes of being adopted as part of the mainstream, for example Ripple or Litecoin, should take note.bitcoin investopediaIt appears that regulation of cryptocurrencies will start with the exchanges, as governments put up barriers to exchanging national currencies to either deter users or to make the cost onerous.bitcoin price forecast 2014As an example, earlier in February, the price of Bitcoin and other cryptocurrencies dropped sharply following the announcement from China that two of its major exchanges had suspended Bitcoin and Litecoin withdrawals for one month.litecoin dollar

The claim made by the exchanges was that the suspension is to enhance security procedures in respect of their anti-money laundering capabilities and other legal risks.bitcoin to usd google financeTaxation is another aspect to consider.The Israeli authorities have considered applying capital gains tax to Bitcoin sales; treating them as intangible property rather than foreign currency.The same questions are being asked in each jurisdiction.At present, the UK Exchequer and the New York State Department of Taxation have opted not to make cryptocurrencies subject to sales tax.In contrast, Australia has considered applying such a tax to all digital currency purchases.This will be an important area to monitor as interest grows.Attempts by national governments to constrict Bitcoin and other mainstream cryptocurrency growth must be approached with caution.Over regulation or taxation of the mainstream cryptocurrencies may see the benefits of these digital currencies stripped away, risking their abandonment by users in favour of newer cryptocurrencies that are truer to the original concept.

In this way, cutting the head of this hydra may create more rather than fewer problems.Christian Kourtis is an associate at the international law firm Gowling WLG.Related reading Feelings of economic uncertainty are highest amongst execs working in financial services and banking, according to new research Andy Hart, Head of Investec's Asset Finance Group and James Arnold, Head of Investec Corporate Treasury, discuss how to manage foreign exchange risk after Brexit Karan Lal of REL explores the impact of Brexit on working capital, and how businesses can adapt to a new economic environment in the UK Total fundraising in the second half of 2016 increased by 47%, according to the analysisThe announcement, which had been expected by the bitcoin industry following recent negotiations with HMRC, was set out in a briefing note on the wider tax treatment of so-called 'cryptocurrencies', including in relation to corporation tax and capital gains tax (CGT).HMRC's classification of bitcoin as a payment service comes as authorities consider the legal and regulatory status of the emerging asset.

, said that HMRC had been faced with a dilemma over whether or not to treat bitcoin as a 'currency' for tax purposes."It's interesting that HMRC has looked for VAT exemption in the legislative provisions regarding payment services and bank accounts as opposed to those concerning currency," he said."One assumes that this is because of bitcoin's status as a cryptocurrency without the backing of a sovereign state and central bank.It may be that HMRC was concerned about putting it in the same tax basket as traditional currencies for fear of causing confusion as to its regulatory position.""The recent difficulties faced by the MtGox bitcoin exchange, which has recently filed for bankruptcy in Japan after losing an estimated 750,000 of its customers' bitcoins, show the potential risks still inherent for those trading in virtual currencies.It may also be that such issues have played on the mind of HMRC and led to thinking that VAT exemption may be useful as a control against VAT fraud: the problems of the carbon emissions trading market over the last few years has shown the susceptibility to organised VAT fraud within some new marketplaces and asset classes," he said.

In its briefing note, HMRC noted that the VAT treatment adopted in the UK had to be consistent with any measures that may eventually be implemented EU-wide.It said that its position was "provisional pending further developments", but that any changes introduced at EU level or by regulators would not be applied retrospectively.Bitcoin is a digital asset with monetary value, but it is not currently recognised as an official currency anywhere in the world.Some retailers accept payment by bitcoin for goods and services but most traders, especially in the EU, have not yet put systems in place to accept them in transactions.Virtual currencies are not currently regulated anywhere in the EU; however, the European Banking Authority (EBA) plans to appoint a taskforce to advise it on whether they should be.HMRC has taken the view that the creation, or 'mining', of bitcoin will generally be outside the scope of VAT as it "does not constitute an economic activity for VAT purposes".Income received by those mining the currency for related activities, such as the provision of services in connection with the verification of specific transactions for which specific charges are made will fall within the payment services exemption.

VAT will not be due on the value of bitcoins exchanged for sterling or foreign currencies, and any transaction charges will be exempt from VAT, according to the note.VAT will, however, be due in the normal way from suppliers of any goods or services sold in exchange for bitcoin or other cryptocurrencies.The value of the supply on which VAT is due will be the sterling value of the cryptocurrency at the point that the transaction takes place.Although HMRC's policy avoided the "currency question", VAT expert Darren Melllor-Clark said that the payment services exemption relied on by HMRC could create its own set of problems."HMRC will need to be alert to claims, by traditional currency operators, of unfair or excessively favourable treatment being granted to this emerging alternative sector," he said."In particular, recent case law developments have narrowed the scope of the VAT exemption for those offering transaction services in relation to established currencies.If bitcoin traders enjoy exemption where the established sector does not, there may well be cries of foul."

"Businesses would be well served to note that the HMRC brief is very clear that these arrangements are provisional and subject to changes as the bitcoin position evolves," he added.In relation to corporation tax, income tax and capital gains tax, HMRC said that whether these taxes would apply to activities involving cryptocurrencies would depend on the activities and the parties involved.Although in many cases the normal rules would apply, HMRC said that in some cases a transaction "may be so highly speculative that it is not taxable or any losses relievable", under the same rules that apply to gambling wins and losses."Given the volatility of bitcoin, it is not surprising that HMRC sees these transactions as potentially so speculative that they are akin to gambling and so outside the tax net altogether," said corporate tax expert Heather Self of Pinsent Masons."It is more likely that HMRC will run this argument where taxpayers are trying to get relief for large losses, rather than where they have made huge gains."