US slaps tax on bitcoin as IRS deems it to be 'property'

PUBLISHED : Thursday, 27 March, 2014, 1:21am
UPDATED : Thursday, 27 March, 2014, 11:40am

Hong Kong should have a clear stance on regulating the bitcoin virtual currency and whether it should be taxed, financial analysts say.

They were speaking after a decision by the United States Internal Revenue Service on Tuesday to treat virtual currency as property for tax purposes, instead of as currency.

The IRS said general tax principles applicable to property transactions would apply to transactions using virtual currency. It did not recognise virtual currency as legal tender to determine if a transaction caused a foreign currency gain or loss under US tax law.

On the same day, Denmark announced that gains or losses from bitcoin trading were not subject to taxation.

Watch: What's Bitcoin and how does it work?

Zennon Kapron, founder of Hong Kong-based financial consultancy Kapronasia, said he believed it meant that both the US and Danish governments had realised the need to regulate bitcoin transactions, and Hong Kong should take a clear stance.

"Hong Kong should regulate bitcoin somehow and have a stance on it one way or another. It's important for bitcoin's continuous development."

Kapron said the US move would make bitcoin holders' bookkeeping more complicated because they would need to include in income the value of the currency when a transaction was made.

He said although the Hong Kong currency was pegged to the US dollar, its tax regime was more favourable to investors with a lack of "stringent" tax policies, enabling bitcoins and other innovations to realise their potential. He did not comment on whether the city should tax bitcoin holders, but said he believed the Monetary Authority would look at the US move and make a decision.

Hao Hong, managing director of research at China's Bank of Communications, said taxing bitcoin holders would undermine their interest in holding virtual currency. He did not think Hong Kong would follow this "extreme" policy, because virtual currency had not had as big an impact on the Hong Kong dollar as on its US counterpart.

Bitcoin started circulating in 2009 and is independent of any central banking system. It can be created online by using a computer to complete tasks, a process known as mining. The maximum potential number of bitcoins is 21 million, compared with about 12 million now in circulation.

The Financial Services and Treasury Bureau said it needed time to gain a better understanding of the US decision before it could comment.

The bureau issued a warning on March 14 of consumer, money laundering and cybercrime risks associated with trading in virtual commodities. It said commodities such as bitcoin were not currency and were not legal tender.

The city did not regulate virtual commodities, it said, but authorities would closely monitor further developments "with a view to taking further action to ensure proper protection for the public".