The Australian Tax Office (ATO) on August 20, 2014, released comprehensive but general guidance on the tax treatment of cryptocurrencies in Australia, and specifically bitcoin.
The ATO has decided that transacting with bitcoins is akin to a barter arrangement, with similar tax consequences. The ATO’s view is that Bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, considered to be an asset for capital gains tax (CGT) purposes.
According to the guidance, there will generally be no income tax or GST implications if the taxpayer is not in business or carrying on an enterprise and bitcoin is simply used to pay for goods or services. Where bitcoin is used to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is AUD10,000 (USD9,290) or less.
When receiving bitcoin in return for goods and services, a business may be charged GST on that bitcoin. If the supply of the goods and services is a taxable supply, the business will be able to claim input tax credits on the GST charged on the bitcoin they received as payment.
Persons receiving bitcoin for goods or services they supply as part of a business will need to record the value in Australian dollars as part of their ordinary income. This is the same process as receiving non-cash consideration under a barter transaction. The value in Australian dollars will be the fair market value which can be obtained from a reputable bitcoin exchange, the guidance suggests.
It states that persons carrying on a business and purchasing business items (including trading stock) using bitcoin are entitled to a deduction based on the arm’s length value of the item acquired.
GST is, however, payable on the supply of bitcoin “made in the course or furtherance of the enterprise.” GST is calculated on the market value of the goods or services. This is ordinarily equal to the fair market value of the bitcoin at the time of the transaction.
If an employee has a valid salary sacrifice arrangement with their employer to receive bitcoins as remuneration instead of Australian dollars, the payment of the bitcoins is a fringe benefit and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act. In the absence of a valid salary sacrifice agreement, the remuneration is treated as normal salary or wages, subject to pay as you go obligations as usual.
Capital gains tax consequences may arise on the disposal of bitcoin as part of the carrying on of a business. However, any capital gain is reduced by the amount that is included in a person’s assessable income as ordinary income.
For bitcoin mining activities, any income that a person derives from the transfer of the mined bitcoin to a third party should be included in that person’s assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses made from the mining activity may also be subject to the non-commercial loss provisions. In these circumstances, Bitcoin is trading stock and persons engaged in mining activities are required to bring to account any bitcoin on hand at the end of each income year. GST is also payable on the supply of bitcoin made “in the course or furtherance of a bitcoin mining enterprise.” Conversely, input tax credits may be available for acquisitions made in carrying on a bitcoin mining enterprise.
With respect to bitcoin exchanges, including bitcoin ATMs, where a person is carrying on a business of buying and selling bitcoin as an exchange service, the proceeds derived from the sale of bitcoin should be included in assessable income. Any expenses incurred in respect of the exchange service, including the acquisition of bitcoin for sale, are allowed as a deduction. In these circumstances, the bitcoin is trading stock and the taxpayer is required to bring to account any bitcoin on hand at the end of each income year.
GST is payable on a supply of bitcoin by a person engaged in bitcoin exchanging activities, where such activities are “in the course or furtherance of an exchange service enterprise.” Input tax credits are available for bitcoin acquired if the supply of bitcoin is a taxable supply.
Persons acquiring bitcoin as an investment, but who are not carrying on a business of Bitcoin investment, will not be assessed on any profits resulting from the sale or be allowed any deductions for any losses made (however, capital gains tax could apply). The guidance states, however, that if transactions amount to a profit-making undertaking or plan then the profits on disposal of the bitcoin will be assessable income.
The Chairman of the Australian Digital Currency Commerce Association, Ronald Tucker, said the ATO’s guidance is “a needed first step on the potential tax treatment for digital currencies,” but said, “much more work needs to be done to get the settings right.”
Commenting, he said: “On the positive front, the ATO has confirmed that Bitcoin is a legitimate asset for CGT purposes, and is not some digital fancy. This also means that consumers can purchase goods or services with bitcoins for personal consumption, with no adverse tax implications up to the value of AUD10,000.”
He noted, however, that: “The ATO’s paper has unfortunately taken the position to treat the supply of bitcoins the same way as an exchange of a commodity; something that would involve the costly and impractical imposition of GST on the supply of bitcoin.”
“Bitcoin by its very nature is used as a currency and a store of value, and we believe it should be treated by the ATO in the same way as other financial inputs such as foreign exchange. It is notable that other jurisdictions with similar tax systems to Australia, such as the United Kingdom, have rejected the view taken by the ATO’s guidance paper, with the purchase of bitcoins not attracting UK VAT.”
“The digital currency industry in Australia is a hotbed of innovation and entrepreneurship and has the potential to make the country a regional, if not a global leader in financial services.”
“This potential, however, could easily be undermined by an uncompetitive and unworkable tax regime that sends the industry offshore to other countries, such as Singapore and Hong Kong, where of course Australian GST does not apply.”
“Australia already punches well above its weight in financial services and we are confident the ATO will work proactively to create a tax regime which creates jobs and revenue for the national economy.”