ATO released a paper for tax treatment of cryptocurrency.
The guidance paper provides an overview of the tax treatment for transactions associated with crypto-currencies, specifically bitcoin. Where other crypto-currencies have the same characteristics as bitcoin, the information in this guidance paper applies equally to the taxation treatment for other crypto-currencies.
The guidance in ATO’s paper is general in nature only. Statements about deductibility assume that the ordinary conditions for a deduction are satisfied. For GST purposes, the paper assumes supplies are connected with Australia, relevant taxpayers are registered or required to be registered and supplies are not GST-free. It is assumed that acquisitions satisfy the creditable purpose requirements.
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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, an asset for capital gains tax (CGT) purposes.
The records you require in relation to bitcoin transactions are:
the date of the transactions
the amount in Australian dollars (which can be taken from a reputable online exchange)
what the transaction was for, and
who the other party was (even if it’s just their Bitcoin address).
Using Bitcoin to pay for personal transactions
Generally, there will be no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using Bitcoin). Where you use bitcoin 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 $10,000 or less.
Transactions using Bitcoin in business
Receiving bitcoin as payment for goods or services
If you receive bitcoin for goods or services you provide as part of your business, you will need to record the value in Australian dollars as part of your 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, for example.
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 was a taxable supply, the business will be able to claim input tax credits on the GST charged on the bitcoin they received as payment.
Using bitcoin to pay for goods or services
Where you are carrying on a business and purchase business items (including trading stock) using bitcoin you are entitled to a deduction based on the arm’s length value of the item acquired.
GST is payable on the supply of bitcoin made in the course or furtherance of your 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.
There may also be capital gains tax consequences where you dispose of bitcoin as part of carrying on a business. However, any capital gain is reduced by the amount that is included in your assessable income as ordinary income.
Paying salary or wages in bitcoins
Where 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 and the employer will need to meet their pay as you go obligations as usual.
Where you are in the business of mining bitcoin, any income that you derive from the transfer of the mined bitcoin to a third party would be included in your assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses you make from the mining activity may also be subject to the non-commercial loss provisions.
Bitcoin held by a taxpayer carrying on a business of mining and selling bitcoin, will be considered to be trading stock. You are required to bring to account any bitcoin on hand at the end of each income year.
GST is payable on the supply of bitcoin made in the course or furtherance of your bitcoin mining enterprise. Input tax credits may be available for acquisitions made in carrying on your bitcoin mining enterprise.
Bitcoin exchange transactions
Taxpayers conducting a bitcoin exchange (including bitcoin ATMs)
Where you are carrying on a business of buying and selling bitcoin as an exchange service, the proceeds you derive from the sale of bitcoin are included in assessable income. Any expenses incurred in respect to the exchange service, including the acquisition of bitcoin for sale, are allowed as a deduction. Bitcoin held by a taxpayer carrying on a bitcoin exchange will be considered to be trading stock and you are 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 you in the course or furtherance of your exchange service enterprise. Input tax credits are available for bitcoin acquired if the supply of bitcoin to you is a taxable supply.
Taxpayers transacting with a bitcoin exchange (including bitcoin ATMs)
The tax consequences for transacting with a bitcoin exchange will depend on whether you are acquiring or supplying the bitcoin as part of a business transaction or for investment or otherwise (see the relevant material above and below).
Disposing of bitcoin acquired for investment
If you have acquired bitcoin as an investment, but are not carrying on a business of bitcoin investment, you 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 – although see the comments above about personal transactions). However, if your transactions amount to a profit-making undertaking or plan then the profits on disposal of the bitcoin will be assessable income.
There are no GST consequences where the bitcoin is not supplied or acquired in the course or furtherance of an enterprise you are carrying on.
On 17 December 2014, the ATO finalised a number of rulings (a GST Public Ruling and several Income Tax Determinations) relating to the application of tax laws for Bitcoin and similar crypto-currencies. All of these rulings have application to tax periods before their date of issue as they discuss the operation of laws that were already operative.
However, the Commissioner will not generally apply compliance resources to tax periods that started before 1 October 2014 for goods and services tax, or 1 July 2014 for other tax issues, for taxpayers that can show they have made a genuine attempt to determine the tax treatment of bitcoin and have then adopted a consistent position regarding the tax treatment of bitcoin in those past tax periods.