Tax Treatment of Bitcoin
With the ever-growing popularity and notoriety of bitcoin we have noted below some broad guidance on investing into and using crypto currencies. Clearly part of the attraction of bitcoin as an investment has been the sharp increase in value, however, that carries with it the obvious investment risks as well as some taxation consequences. The ATO’s view on bitcoin and crypto currencies is changing all the time and as it evolves there will be clearer and more stable environment to operate in.
Generally, transacting with bitcoin is similar to a barter arrangement, with similar tax consequences with bitcoin being considered an asset for capital gains tax (CGT) purposes.
Using bitcoin for personal transactions
Generally, there will be no income tax or GST implications if you simply pay for private goods or services in bitcoin (for example, acquiring personal goods or services on the internet using bitcoin). Any capital gain or loss is disregarded whether you use bitcoin to purchase goods or services for personal use or consumption provided the cost of the bitcoin is $10,000 or less. This general position will no doubt be subject to rigorous review from the ATO.
Using bitcoin for business transactions
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.
From 1 July 2017, sales and purchases of digital currency such as bitcoin are no longer subject to GST. Where you purchase business, items using bitcoin (including trading stock) 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.
If you have acquired bitcoin as an investment capital gains tax could apply (note the comment above about personal use). As such, the normal rules around cost base, holding periods and sale proceeds apply when acquiring and disposing of bitcoin.
The appropriate structuring around holding investments also applies to bitcoin and other crypto currencies.
Should you have any questions in relation to the taxation consequences of any of your investments or of the appropriate holding structures please contact your engagement partner on 02 9283 1666