Virtual currencies – ATO guidelines for bitcoin
In April this year, Lavan Legal’s Finance News published an introductory article relating to virtual currencies (which can be found here). In the article, we noted the uncertainty of how the Australian Taxation Office (ATO) would treat virtual currencies.
On 20 August 2014, the ATO released its long anticipated guidance, in the form of a guidance paper and draft rulings,¹ on how transactions associated with crypto-currencies, specifically bitcoins, will be treated for taxation purposes within Australia’s current legislative framework (namely, A New Tax System (Goods and Services Tax) Act 1999 (Cth) (GST Act), the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and the Fringe Benefits Tax Assessment Act 1986 (Cth) (FBTAA Act)).
As anticipated in our earlier article, the ATO’s position is that bitcoin are property for taxation purposes and are not money nor foreign currency. This then means that bitcoin transactions are to be treated like non-cash barter arrangements, with similar tax consequences. This view is largely in line with the guidance released by the US Internal Revenue Service in March 2014.
Bitcoin users
Essentially, the ATO views bitcoin users in two categories:
Goods and services tax
It is the ATO’s view that bitcoin are neither money² nor foreign currency, and that the “supply” of bitcoin is not a “financial supply” for goods and services tax purposes.³
This means that when bitcoin are used in a transaction with another business, there will be two GST liabilities, being the supply of the goods or services being provided and the supply of the bitcoin which has been used for payment.
If, however, the transaction is a Personal Transaction and the purchase amount in question is under $10,000, there will be no GST implications.4
Capital gains tax
The ATO confirmed that it will treat bitcoin as an asset for capital gains tax (CGT) purposes.5/p>
The disposal of a bitcoin to a third party gives rise to a CGT Event. The taxpayer will make a capital gain from the CGT Event (being the disposal of the bitcoin) if the bitcoin is sold for more than it was purchased for. Essentially, bitcoin are to be treated like shares or similar assets.
However, there is an exemption for capital gains made from a personal use asset (being a CGT asset (bitcoin) which is used or kept mainly for personal use and enjoyment).6 This exemption will apply if:
Income tax
It is the ATO’s view that when bitcoin are held for the purpose of sale or exchange in the ordinary course of a business, it is trading stock for the purpose of s 70-10(1) of the ITAA.7 Accordingly, taxpayers that derive income from bitcoin mining or exchange are required to account for any bitcoin at hand at the end of the income year.8
Any income that is derived from mining bitcoins, or from the transfer of a bitcoin to a third party, will be included in the taxpayer’s assessable income.9 Similarly, any expenses which a taxpayer incurs in respect to the “mining” itself will be an allowable tax deduction.
As with income derived from bitcoin “mining”, income that is derived from bitcoin exchange transactions (i.e. people carrying on a business buying or selling bitcoin as an exchange service), will be included in a taxpayer’s assessable income. Similarly, any expense incurred in relation to that exchange service, including the acquisition of bitcoin for sale, will be an allowable tax deduction.10 GST is also payable on the supply of bitcoin made or provided by the taxpayer in the course or furtherance of bitcoin mining or exchange.
When bitcoin are received by a taxpayer in the ordinary course of business for goods or services which have been provided, the business must report, as its ordinary income, the Australian dollar value of the bitcoin received.11 If a taxpayer purchases items for their business using bitcoin, they are entitled to a tax deduction based on the arm’s length value of the item(s) acquired.
Fringe benefit tax
The ATO views the provision of bitcoin from an employer to an employee in respect to their employment as a property fringe benefit for the purpose of s 136(1) of the FBTAA Act.12 Meaning, that if an employee receives bitcoin as part of their remuneration, it is a property fringe benefit and fringe benefit tax may apply.
Response to ATO guidance paper
In response to the ATO’s guidance paper, concerns have been expressed that the potential tax treatment will have adverse affect on the fledgling Australian bitcoin industry. A number of Australian bitcoin exchanges have announced that they will have to charge users 10% GST, which will make their services substantially more expensive than those from other countries.
Such regulatory burdens may stifle the new industry by driving the bitcoin industry underground or causing startups to move overseas to jurisdictions with more favorable tax laws. Australian bitcoin exchange CoinJar commented on its blog that “we don’t believe the ATO’s guidelines are ideal for bitcoin in this country. We believe in a simpler financial system, and we will continue work with the ATO to help them discover a fairer position.”13
However, not all responses to the ATO’s guidance paper from the Australian bitcoin industry have been negative. A Melbourne-based company is hoping to list on the Australian Securities Exchange in November 2014. The Company’s founder has been quoted as saying “how the ATO envisages taxing bitcoin is by far the most, all encompassing and flexible in the world,” and that “…listing on the main board of the ASX will help legitimise, not only ourselves, but the industry as well.”14 The proposed listing is a positive step forward for the Australian bitcoin industry, as the company will be one of the first bitcoin companies to float on an official stock exchange.
Lavan Legal comment
Following the concerns voiced by the Australian bitcoin industry, on 2 October 2014 it was announced that the Senate Economics References Committee is to conduct an inquiry into bitcoin and digital currency implications. In reference to the ATO’s guidance paper, one of the aims of the inquiry is to develop an effective regulatory system in relation to the definition and treatment of digital currencies under Australian tax law. The inquiry is tasked to examine various industries including the banking, retail and financial services industries and is to focus on how Australia can take advantage of digital currency technology to establish itself as a market leader in this field.
Lavan Legal welcomes the inquiry and eagerly awaits the final report on the inquiry which is due on 14 March 2015. We hope that the inquiry will provide clear guidance in the nascent bitcoin industry, encourage innovation and provide adequate checks and balances to address the potential for adverse disruptions to the banking, retail and financial services industries.
We will continue to keep you updated about developments as they occur.
[1] Australian Taxation Office, ‘Tax treatment of crypto-currencies in Australia – specifically bitcoin’, Guidance Paper, 20 August 2014 (Guidance Paper); Draft Goods and Services Tax Ruling GSTR 2014/D3; Draft Taxation Determination TD 2014/D11; Draft Taxation Determination TD 2014/D12; Draft Taxation Determination TD 2014/D13; Draft Taxation Determination TD 2014/D14.
2 As defined in section 195-1 of the GST Act.
3 Draft Goods and Services Tax Ruling GSTR 2014/D3 at [6].
4 Draft Goods and Services Tax Ruling GSTR 2014/D3; Guidance Paper.
5 Draft Taxation Determination TD 2014/D12 at [1].
6 Section 108-25 of the ITAA 1997; Draft Taxation Determination TD 2014/D12.
7 Draft Taxation Determination TD 2014/D13 at [1].
8 Draft Taxation Determination TD 2014/D13 at [13]; Guidance Paper.
9 Guidance Paper.
10 Guidance Paper.
11 Guidance Paper.
12 Draft Taxation Determination TD 2014/D14 at [1].
13 https://blog.coinjar.com/2014/09/30/how-the-new-ato-guidance-affects-coinjar-users/
14 Jessica Sier and Ruth Liew, “Local digital currency group eyes ASX listing” (Australian Financial Review), 14 October 2014, 16.
