The Treasury and other EU governments are cracking down on cryptocurrencies such as Bitcoin amid fears of cybercrime, money laundering and tax evasion.

Under the EU-wide legislation, which expands upon existing anti-money laundering legislation, traders will be obligated to disclose their identities, carry out due diligence and report suspicious activity, in efforts to reduce conditions that foster illegal activity. Bitcoin has become a favoured currency of drug dealers and criminals due to its anonymity.

Although volatile, Bitcoin has seen its value skyrocket by over 1,000% in the past year, reaching a record high of over $11,000 this month.

Bitcoin has also seen itself slowly becoming more mainstream, with stores and services increasingly accepting it. PwC Hong Kong recently became the first Big Four firm to accept it as payment for its advisory services.

It has also recently produced its first billionaires, the Winkelvoss twins, better known for their early connection to Facebook.

In October Stephen Barclay, economic secretary to the Treasury, said the government was negotiating amendments to the 4th anti-money laundering directive that would “bring virtual currency exchange platforms and custodian wallet providers into anti-money laundering and counter-terrorist financing regulation.”

The changes are expected to come into force early next year.

Some experts have suggested that regulation will facilitate Bitcoin’s growth by giving it legitimacy and creating trust.

Tax issues

The increasing prevalence of cryptocurrency calls for increased governmental scrutiny into appropriate regulatory and tax practices. A Treasury spokesperson said: “We have clear tax rules for people who use cryptocurrencies, and like all tax rules, these are kept under review.”

“We also intend to update regulation to bring virtual currency exchange platforms into anti-money laundering and counter-terrorist financing regulation.”

“Right now in the UK, cryptocurrencies do come under the taxman’s purview”, said Robert Langston, tax partner at accounting firm Saffery Champness.

Langston explained that HMRC typically relies on three possible treatments; “trading profits subject to income tax, speculative transactions treated as gambling and therefore not subject to income tax, and capital gains subject to capital gains tax.”

He said: “Regarding trading profits, a large volume of cryptocurrency transactions, where positions are taken for a short time only, may reflect a number of potential ‘badges of trade’, but if viewed by the courts in the same way as personal share dealings, cryptocurrency profits are very unlikely to be treated as trading profits.”

He added that cryptocurrency profits are also unlikely to be viewed as gambling profits as the trading strategies do not solely rely on chance.

However, cryptocurrencies are still liable to capital gains tax, as “they are intangible assets which carry certain rights, and can be bought and sold.” He said: “HMRC’s existing guidance pre-supposes that cryptocurrencies can be chargeable assets for CGT purposes.”

These regulations are likely to be the beginning of government considerations into how to best handle cryptocurrency. MP John Mann, part of the Treasury Select Committee, told the Telegraph that it is likely the committee will open an inquiry into cryptocurrency in the next year, adding: “These new forms of exchange are expanding rapidly and we’ve got to make sure we don’t get left behind – that’s particularly important in terms of money-laundering, terrorism or pure theft.”

Langston added: “We would also anticipate greater scrutiny of the accounting and tax treatment in the companies which are issuing tokens via initial coin offerings (ICOs).”

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