7

Assuming:

  • I am a UK tax payer
  • I live in the UK

Assume I sell a good online, for $100. One payment method I accept is Bitcoins. Bitcoins at the moment are extremely volatile, it wouldn't surprise me if the price fell or rose huge amounts intra day.

Assume $1 = 1BC, and so I sell my product for 100BC. If I hold onto those 100BC, and the value of the BC rises to $2/BC, or falls to $0.5/BC meaning my Bitcoins are now worth either $200 or $50, are the gains taxable, and are the losses tax deductable?

IE, in the first instance would I have to pay tax on $200 when I convert it to my normal currency? If it dropped in value and they are now worth $50, would I have to pay tax on $50 or $100? Have I suffered a $50 loss?

Thanks for any help!

5

Here is the technical guidance from the accounting standard FRS 23 (IAS 21) 'The Effects of Changes in Foreign Exchange Rates' which states:

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise.

An example:

You agree to sell a product for $100 to a customer at a certain date. You would record the sale of this product on that date at $100, converted at the current FX rate (lets say £1:$1 for ease) in your profit loss account as £100. The customer then pays you several $100 days later, at which point the FX rate has fallen to £0.5:$1 and you only receive £50. You would then have a realised loss of £50 due to exchange differences, and this is charged to your profit and loss account as a cost. Due to double entry bookkeeping the profit/loss on the FX difference is needed to balance the journals of the transaction.

I think there is a little confusion as to what constitutes a (realised) profit/loss on exchange difference. In the example in your question, you are not making any loss when you convert the bitcoins to dollars, as there is no difference in the exchange rate between the point you convert them. Therefore you have not made either a profit or a loss.

In terms of how this effects your tax position; you only pay tax on your profit and loss account. The example I give above is an instance where an exchange difference is recorded to the P&L. In your example, the value of your cash held is reflected in your balance sheet, as an asset, whatever its value is at the balance sheet date. Unfortunately, the value of the asset can rise/fall, but the only time where you will record a profit/loss on this (and therefore have an impact on tax) is if you sell the asset.

2

According to the answers to this question, you generally aren't taxed on gains until you sell the asset in question. None of those answered specifically for the U.K., so perhaps someone else will be able to weigh in on that.

To apply those ideas to your question, yes your gains and losses are taxable. If you originally traded something worth $100 for the bitcoins, then when you converted back to dollars you received $200, you would have a $100 gain, simply on the foreign exchange trade. That is, this $100 of income is in addition to any income you made from your business (selling goods).

  • Thanks for the answer, and if they lose value and we end up with $50, does that mean we can state we made a $50 loss? IE, we would only be taxable on $50 and not $100 – Tom Gullen May 17 '11 at 15:46
  • That is my understand, yes. It is a loss, so you can report it as a loss. Keep in mind that this is my assumption, and not necessarily a statement of fact. You may want to check with a tax attorney or HM Revenue and Customs. – Sean W. May 17 '11 at 17:21

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