As we already have heard, the ATO has released draft tax rules for the digital currency bitcoin and other virtual currencies like it.
The Tax Commissioner believes bitcoin is not money or foreign currency and bitcoin transactions should be treated like barter trades, with similar tax results.
Bitcoin industry members and others say the tax rules impose heavier tax compliance burdens on virtual payments than apply to those made with dollars. They say the rules will impede the growth of bitcoin and be an incentive for some to go underground.
But what if you still want to use it?
Bitcoin allows users to transfer money on the internet without using a bank, credit card issuer or a third party like PayPal. The network is controlled by those using it, on a platform of encrypted software maintaining security and anonymity. A user installs a bitcoin “wallet” on their computer or mobile device. Like a bank account, the wallet is used to store bitcoins and transact with other users.
Bitcoins can be purchased with traditional currencies through online currency exchanges – businesses that seek profits by being part of the computer processing network and charging fees for transactions. Bitcoin transactions are recorded publicly and permanently on a register called the Blockchain, which means anyone can see the balance and transactions of any bitcoin address. (You can watch bitcoin transactions happening in real time on the Blockchain website.) However, the identity of the user behind a transaction is not easily revealed.
The benefits of Bitcoin include transacting directly with the other party without the need for financial intermediaries (i.e. banks) and their high fee structures. Bitcoin transactions are said to be faster, cheaper and users can be anonymous. This last feature – anonymity – is the thing concerning the ATO and other agencies like Austrac and ASIC and their overseas counterparts.
On the minus side, the bitcoin price is volatile, payments are irreversible and there is concern over the security of the system and its vulnerability to hackers. There have been some high-profile stories of the hacking of Bitcoin exchanges and the theft of large amounts of the digital currency.
How do the tax guidelines actually work?
Let’s say your small business decides to buy bitcoins to make some payments. You can then set up a digital wallet by downloading software. Then you can buy bitcoin from an Australian based online currency exchange, paying Australian dollars (AUD) and a 2% fee.
With bitcoin in your digital wallet, your company can then pay for a 3D printer as an example. All you need to do is send the payment from its digital address to the supplier’s address. The transaction is processed and confirmed by the bitcoin network and recorded on the general ledger – the blockchain. Later, you will receive a payment in bitcoin from a customer, into your digital wallet.
For tax purposes, the income from the sale of your 3D printing services must be reported in AUD. The ATO says the AUD amount is the fair market value of the bitcoin received, which can be the exchange rate from a reputable bitcoin exchange. (However the issue here is that the ATO does not explain what a reputable exchange is.) All business sales for bitcoin carry the extra compliance burden of identifying the AUD/bitcoin exchange rate. Your business must also charge GST on taxable supplies of services and provide a GST invoice.
How Virtual Currency Increases Real World Administration
It gets more complicated for the purchase of the 3D printer. Your business must establish the AUD cost of the printer to calculate depreciation, using the appropriate exchange rate. But the ATO says paying bitcoin for the equipment is itself a GST supply and GST should be calculated on the “fair market value” of the bitcoin at the time of the transaction. So your business will claim a GST input tax credit on the purchase of the printer and calculate GST payable on the “supply” of the bitcoin payment.
Treating bitcoin in this way means businesses must keep additional records, including a doubling of GST records. Records required for bitcoin transactions are: the date; the AUD amount (from a reputable online exchange); the nature of the transaction; and the other party (it can be their bitcoin address).
Other administrative issues that every business owner needs to take into account include:
- Payment of bitcoins to an employee in an employment context is a property fringe benefit and subject to FBT. Such payments, being property and not money, are not subject to PAYG withholding
- Bitcoin is a CGT asset and a capital gain made on disposal of bitcoin held as an investment will give rise to CGT There are no income tax or GST implications of using bitcoins in personal (non-business) transactions. The $10,000 CGT exemption for personal use assets applies.
The draft rules are said to apply before and after the date of the final rulings but the ATO has been reported as saying that it is “unlikely” they will seek to recover back-taxes as long as people have acted “in a bona fide fashion”.
Bona fide bitcoins – who knew?
About the Author
Edwin Carr is a Tax Writer, CCH Australia