Earlier today the Australian Taxation Office (ATO) released its much anticipated guidance on the taxation treatment of bitcoin. Along with the guidance paper they released a slew of draft rulings.
In their media release the ATO stated that:
“[We have] consulted extensively with bitcoin experts, businesses, industry bodies and other external stakeholders to develop this guidance and explain the obligations of bitcoin users.”
Reading the guidance (and more so the draft rulings) it is clear that they have invested a fair amount of time in understanding what bitcoin is and how it’s being used. In many ways the ATO has released a very complete picture of how they see bitcoin for tax purposes.
Although many have been quick to find fault with the guidance provided by the ATO, the truth is that they have provided a great deal of clarity to businesses and consumers. Further, the depth of analysis provided by the rulings released today gives a solid grounding to the ATO’s view – which is more than what’s been issued by other tax authorities.
The guidance paper that was released by the ATO contains very little ‘meat’ and should be taken for what it is – a general guidance paper. Much of the interesting content is actually contained in the draft rulings that accompanied the guidance paper. For the most part, this is where lawyers and accountants will be spending their time over the next few days.
Having said this, it should be noted that the rulings released by the ATO are all still in draft form and still under consultation. This means that those who wish to engage with ATO can still do so.
It is also worth noting that the ATO’s view is that – a view. It presents what the ATO thinks about bitcoin’s taxation treatment. This is not the definitive view and all tax payers still need to come to a landing on the tax treatment of their bitcoin transactions. In reality, the ATO’s view presents ‘safe ground’ for those looking to work within a set of parameters when determining their tax obligations.
Although, I’ll be referring to bitcoin through out this piece, it is important to keep in mind that the ATO’s view will also apply equally to other crypto-currencies like litecoin and dogecoin.
The main question that always surrounded the tax treatment of bitcoin was its legal characterisation. According to its guidance, the ATO has come to the view that it is legal form property (see TD 2014/D12 at paras 5-14). This to many is not surprising and follows a well worn legal path. From this flows bitcoin’s tax treatment. Specifically, from an income tax perspective, the ATO views bitcoin as a capital gains tax (CGT) asset. Importantly, they stated that in their view the use of bitcoin for the purposes of purchasing goods and services for personal use or consumption will be disregarded for CGT purposes (as personal use assets) provided that the costbase of the bitcoins is less than $10,000 (see below for further details).
The ATO also noted that transactions in the hands of merchants should be treated like other non-cash consideration transaction under a barter transaction. More specifically, the transaction will need to be recorded in Australian dollars and will likely be recognised as ordinary income.
On the Goods and Services Tax (GST) side of the equation, the ATO takes the view that it is a taxable supply and not ‘money’ under the GST Act. Also, it will not be input taxed as a financial supply according to the ATO (See GSTR 2014/D3). This means that for the most part there is the possibility of ‘double GST’ on bitcoin transactions.
As was expected the ATO views bitcoin mining to be on revenue account for income tax purposes – provided that you’re in the business of bitcoin mining. Accordingly, any expenses that are incurred that have a nexus with your mining activities should be deductible. It’s important to note that this could be limited by the non-commercial loss provisions. Along with this, bitcoins held by miners will likely need to be brought to account as trading stock – this is also likely to be the case for exchanges and traders (See TD 2014/D13).
Interestingly, the ATO also released some commentary on the tax reflex of paying wages in bitcoin (See TD 2014/D14). As is now becoming more popular (especially amongst the ‘bro-coder’ community) companies are choosing to pay employees in bitcoin. The ATO noted in their paper that these payments could be subject to fringe benefits tax (FBT) – which could end up being, in certain circumstances, a serious disincentive to those looking to pay their wages in bitcoin.
The ATO also took this as an opportunity to clearly rebut the question of whether bitcoin is a ‘foreign currency’ for the purposes of Div 775. Although few thought that these provisions would apply, it was presumably an important point due to the idea that some had about bitcoin being a ‘currency’ – this is clearly refuted in TD 2014/D11 with a number of key cases supporting this view (see specifically TD 2014/D11 paras 16-25).
Overall, Joe Hipster in the bitcoin community will likely be pleased with the ATO’s guidance. The main reason he’ll be jumping off his Eames chair is the applicability of the personal use ‘exemption’ (see s 118-10(3) of ITAA 1997). Broadly, this provision disregards any capital gains made from a personal use asset (that is, a CGT asset that is kept mainly for personal use or enjoyment) if the cost base is $10,000 or less.
This is obviously great news as it means that consumers buying coffee with their bitcoin will not have to bother with recording their purchases and determining the capital gain or loss associated with each individual purchase. Paperwork nightmare averted.
Although this is all well and good for the consumer, the merchant may not be in such a fortuitous position. As noted above, the ATO has taken the view that bitcoin is a taxable supply for GST purposes. This creates a fair amount of concern to those offering bitcoin as a means of payment. In the instance where they hold bitcoin and then wish to exchange it for fiat currency ‘double GST’ could apply. This is where the real friction becomes evident for those hoping bitcoin takes off.
Bitcoin unfortunately is a classic network effect good and requires two sides of a market to work to its full potential. We all know that for bitcoin to really gain breakout velocity it needs to be held and used alongside fiat currency by consumers and businesses alike. This means that its tax treatment, amongst other things, needs to be equally workable for consumers and merchants. Unfortunately, this is where the guidance paper and the associated rulings start to highlight the battle that bitcoin faces in gaining widespread adoption.
Having spoken to a few bitcoin startups it is clear that the big issue that many had concerns over was the GST treatment of bitcoin. Many have seen GST as an ‘overhead cost’ when taking into account the double taxation issue. However, the problem becomes more acute for exchanges, for example, who purchase and then resell bitcoins to consumers – this could result in GST applying to the full purchase price. As you can imagine this makes the business a total non-starter especially if those bitcoins are obtained from overseas. When this is taken in tandem with the potential FBT impact of paying employees in bitcoin it is likely few in the bitcoin startup community will be overjoyed by the ATO’s guidance.
For those who have spent some time in the ecosystem, you’ll know that bitcoin is currently all about the ‘on ramp’. In many ways the issue of GST is even more pronounced as it presents a market impediment to getting people into the ecosystem at a ‘reasonable’ price. Although (from a tax technical perspective) the ATO’s view is solid, the market reality is that many will now need to think about novel ways to work with the ATO’s view.
Some in the media have already started to note that the ATO’s view will push bitcoin startups offshore. The reality is that this is not the biggest issue an Australian bitcoin startup faces. Issue like the current Australian employees share scheme provisions, more attractive tax rates and overall access to larger markets are more likely inversion lures for bitcoin startups – so don’t believe the hype.
The reality is that the ATO’s view reflects a mixed bag of outcomes and it really depends on which quadrant of the ecosystem you live in. The clear winner has been the bitcoin consumer who now doesn’t really need to worry about the CGT impact of spending bitcoins on consumer purchases – provided the costbase is $10,000 or less. While on the other hand, the bitcoin startup scene is left to consider how it deals with the possible impost of double GST on transactions.
This article does not constitute legal, accounting or tax advice. Any tax-related opinions in any part of this article are not tax advice, and were not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties or for promoting, marketing, or recommending to another party any transaction or matter addressed herein. Everyone should seek the advice of a competent, independent tax professional regarding their particular circumstances.
I make no claims, promises, or warranties about the accuracy of the information provided in this article. Tax advice cannot be provided on a general basis, and must be specifically tailored for each individual by their particular representative. Everything included in this article is the author’s opinion and not a concrete fact.