Bitcoin is just one of a several virtual or cryptocurrencies that you would know of from news reports in recent months and its usage has increased worldwide.
The currency is not regulated, nor is it managed by a central bank, instead relying on an open source cryptographic protocol for the creation, storage and transfer of currency.
Lauded for its convenience and lack of dependence on a central authority as much as it is derided for its unpredictability and the anonymity it grants criminals, global digital phenomenon Bitcoin and other cryptocurrencies have spread to every corner of the world and are transforming the very essence of monetary transactions.
Is it safe to use Bitcoin and other cryptocurrencies in business transactions and what are the tax implications of doing so?
Blockchain as a technology has a place – though we don’t know what that is yet.
While taxation authorities worldwide, including the Australian Taxation Office (ATO), are considering how to treat Bitcoin transactions, most of us are wondering when the bubble will burst and maybe it already has.
The ATO issued some specific guidance including a draft Taxation Determination on whether the forex (foreign exchange) provisions will apply.
More information on tax treatment of bitcoin and cryptocurrencies like bitcoin can be found in the Taxation determinations below:
- TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)?
- TD 2014/26 Income tax: is bitcoin a CGT asset for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
- TD 2014/27 Income tax: is bitcoin trading stock for the purposes of subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
- TD 2014/28 Fringe benefits tax: is the provision of bitcoin by an employer to an employee in respect of their employment a property fringe benefit for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?
Additional information from ASIC and AUSTRAC maybe useful for anyone looking to invest or transact in cryptocurrencies:
- ASIC’s Money Smart website has some useful information on the risk involved in investing in cryptocurrencies.
The best approach for investors and businesses is to talk to their accountant about their specific exclusions and how this applies to the treatment of Bitcoin and other cryptocurrency transactions are covered by the existing tax law and not new law.
What you should know:
- There is a total of only 21 million Bitcoins that will ever be created.
- Bitcoin is not a regulated currency.
- Bitcoins cannot simply be withdrawn as cash in real life.
- There are three ways to obtain Bitcoins – by mining them, buying them from someone who already has the currency, or providing goods and services and accepting them as payment from someone.
The third way is possible because Bitcoin is becoming an increasingly accepted virtual currency used by businesses around the world – even in Australia.
Among local retailers who have adopted Bitcoin are online retailer UndieGuys, the Old Fitzroy Hotel in Sydney’s Woolloomooloo and online legal firm LegalVision. On an international level, WikiLeaks and WordPress accept Bitcoin as payment.
The factors driving Bitcoin’s growth are its appreciating value, decentralised status, how it allows traders to buy and sell various goods in real time, lack of currency conversion costs when buying and selling overseas as well as the absence of transaction costs typically attached to credit cards and rival electronic forms of payment like PayPal.
Taxation in Australia
Tax rules that apply to average commercial transactions should generally apply in the same way to the use of cryptocurrency transactions, in the absence of specific provisions in the tax law that cater for virtual currency.
The central question revolves around whether Bitcoin transactions should be taxed under the capital gains tax (CGT) provisions (like many types of transactions involving the transfer of ownership of shares or other capital assets) or whether use of cryptocurrencies should be taxed on revenue account. There may also be a need to convert the value to Australian dollars.
The Australian Taxation Office has emphasised that Bitcoin transactions have always been taxable, so for those individuals who have been using the Bitcoin currency for some time without correctly accounting for their tax liability, the potential exists for the ATO to look as far back as 2009 to amend tax returns (or 2011 for many individual taxpayers).
Be mindful that where the Tax Office can prove fraud, there is no time limit that applies. Further details regarding how the Tax Office would audit transactions using the mysterious currency has not been provided as yet.
The Australian Taxation Office advises keeping records for cryptocurrency transactions, including:
- the date of the transactions
- the amount in Australian dollars (which can be taken from a reputable online exchange)
- the purpose of the transaction
- who the other party was (even if it is just their bitcoin address).
For further information from the ATO visit:
If you’d like to discuss these issues further with an MWM advisor, simply call 07 5596 9070 or email – firstname.lastname@example.org – to book an appointment.