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Tax Treatment of Virtual Currencies

September 2014 

The Australian Tax Office has recently released its position on the tax treatment of bitcoin and other virtual currencies, saying that it is not a money or foreign currency, nor is it financial supply for GST purposes. However, it has said that Bitcoin is a CGT asset. The much anticipated ATO view has disappointed proponents of the alternative payment system.

What is bitcoin?
Bitcoins were the first of several virtual – or cyber – currencies that are used in a similar way to money to buy or sell goods, only it is exclusively used online in a digital form. There are more than 450 alternative online currencies like it however these are not considered legal tender in most tax jurisdictions. 

Coined by Satoshi Nakamoto in 2008, bitcoins were established by 2009. Bitcoins can be bought and sold or "mined" (earned) by people who participate in logging and verifying transactions in a public ledger called a "block chain. 

The digital coins, whether acquired or mined, are then transferred to your digital wallet (personalised bitcoin account). These bitcoins can then be used to purchase goods and services like any other form of currency. 

So, what does all this mean and why has bitcoin got the attention of the Australian Tax Office?

Impact on businesses using bitcoin

If you are in business, bitcoin, like the barter systems that sprang up a few years ago, needs to be treated in the same way as any other form of payment if you are disposing of it. However, the additional work now required by business to administer bitcoin might be a major disincentive to continuing to use it. 

If you receive bitcoin for goods or services you provide as part of your business, you need to record the fair market value in Australian dollars as part of your ordinary income. Effectively you have sold goods on one hand and have acquired a capital asset on the other. Alternatively if you sell bitcoin and receive goods for that bitcoin, there are two separate transactions. 

The detailed rules relating to capital gains tax are too complex to reiterate appropriately in this article, but the main features that will apply to bitcoin are as follows:

  • If you make a capital loss, you can only offset  that loss against a capital gain;
  • If you are operating through a trust, as a sole trader or partnership (i.e. not a company) and you make a gain, on bitcoin held for more than 12 months, you should be entitled to the 50% GST discount. Companies do not enjoy the 50% discount in capital gains.
  • If you are in the business of buying and selling (i.e. trading) bitcoin. Gains, or losses from that trading income may be taxed as ordinary income. 

 

If your business is registered for GST and you are paid for goods and services you supply using bitcoin, like any other transaction you need to add GST to the price of the goods and services.  If you pay for goods and services you receive using bitcoin and are registered for GST, you will have a GST liability in relation to bitcoin you used to pay for the goods and services.  The other party to the transaction may be able to claim GST credits for the GST that relates to the use of Bitcoin to pay for the transaction. 

Impact on individuals using bitcoin

If you use bitcoin for your own personal use there is no tax impact unless you make a gain on trading bitcoin.  If you make a gain on bitcoin, capital gains tax can apply although there is no need to recognise the gain in your tax return if the cost of the bitcoin you used was $10,000 or less.

There are around 13 millions bitcoins in circulation at present with a reported cap of 21 million.   

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Last updated September 2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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