HMRC is in the process of reviewing how the virtual currency, Bitcoin, is taxed.

The taxman is deciding whether Bitcoin should be treated as private money rather than a voucher, as is currently the case. The reclassification of the somewhat controversial currency would limit VAT on transactions, which is currently at 20%.

There is a VAT exemption for buying and trading currencies but the currency must be legal tender and at present this does not apply to Bitcoin. As a result, tax monitoring on transactions is not properly controlled and businesses that accept the currency could face a potential “double tax”.

The move follows a rise in demand for Bitcoins, the value of which has risen from under $50 (£30) a year ago to $1,200 (£730) in December last year – the rate is currently at around $900 (£550). More and more businesses are accepting the cryptocurrency as payment and authorities are concerned about the potential for it to be used for money laundering and other illegal activities if they cannot find a way to monitor trade.

An option that is currently being discussed between members of the Bitcoin community and HMRC is to treat Bitcoin as an asset, which means that capital gains tax can be charged on the difference between buying and selling. There would then be no sales threshold as tax would be levied on gains rather than revenue, thereby eliminating the potential to lose out on bulk trade.

Germany made the move to impose capital gains tax on the virtual currency in August 2013 and has since had a successful response. Representatives at HMRC say they are reviewing this “complex area” in order to reach a viable decision about how tax should be applied.