Experts say that Bitcoin’s legalization in El Salvador could allow traders to take advantage of capital gains tax exemptions.
After El Salvador became the first country in the world to legalize cryptocurrency, the taxman could miss out on millions of pounds in revenue.
According to tax experts, HMRC is facing a legal challenge by investors who want to reduce their taxes bills by taking advantage of a loophole that allows foreign currency transactions.
Capital gains tax is not applicable to profits made from foreign currency moves held in bank accounts. However, Bitcoin and other cryptocurrencies are exempted from this exemption.
The use of Bitcoin in El Salvador allows it to be treated more favourably tax-wise unless HMRC takes additional action.
Chris Etherington is RSM’s tax partner. He said that there are some hurdles to overcome, but that this is an important first step toward Bitcoin being exempted in the UK if it meets certain criteria.
HMRC will likely face legal challenges by traders seeking to take advantage of the foreign currency exemption, he said.
Although Bitcoin’s prices have nearly doubled to $54,000 this year, it is still highly volatile.
Nayib Bukele, El Salvador’s authoritarian president is betting big on digital money to make Central America a crypto-hub. El Salvador will launch a $1bn (£750m), “Bitcoin bond”, half of which will be used to create a “Bitcoin City” powered by a volcano.
If Bitcoin is to receive the tax exemption, it must be recognized as a currency by HMRC.
Mr Etherington stated that the “argument becomes more difficult for HMRC” as more countries adopt Bitcoin legal tender and prices become less volatile.
He stated that “that move is likely to be the first in a series.” This is something that other countries are looking into, especially in Latin America.
A spokesperson for HMRC stated that cryptoassets are not considered currency or money by the tax authority.
He said: “We want people to be able to handle their tax affairs correctly and believe taxpayers want it to be right. To help customers correctly apply cryptoasset tax law, we have provided detailed guidance.