The Commissioner of Taxation has recently considered the question “Is Bitcoin a foreign currency?” for income tax purposes. In short, Bitcoin is not a foreign currency.
What is Bitcoin?
Bitcoin is a form of digital currency. Bitcoin is a currency because it is ‘money’. However, Bitcoin is a digital currency as it is created, bought and sold electronically. Bitcoin operates on a decentralised market. In other words, banks or governments cannot control the value of Bitcoin and other cryptocurrencies. The learn more about Bitcoin and cryptocurrency, see here.
Why is Bitcoin not a foreign currency?
Put simply, a foreign currency is any currency other than Australian currency. For instance, the US Dollar is a foreign currency, as Australian currency is the Australian Dollar. Importantly, the legal definition of ‘foreign currency’ was examined to determine Bitcoin’s classification. The true meaning of foreign currency is:
(1) the currency must be the currency of some country, other than Australia and,
(2) the currency must be a unit of money recognised by the laws of that non-Australian country and,
(3) the unit of money must be the means of discharging monetary obligations for all transactions and payments in that another country.
In other words, the foreign currency must be non-Australian and it must be a ‘unit of money’ under the laws of that country. That ‘unit of money’ must be capable of paying for all transactions or payments in that country. Thus, as Bitcoin is not a legally acceptable unit of money capable of covering all transactions and payments, it cannot be a foreign currency. Simply put, although Bitcoin is a form of money, it is not a legal currency.
What does Bitcoin’s currency classification mean for Australia?
As Bitcoin is not a foreign currency, tax implications arising from foreign exchange do not apply. This simply means that if you receive Bitcoin, or pay for goods or services using Bitcoin, then the Australian dollar value of the transaction must be included in your assessable income. This does not mean that Bitcoin is not taxable. However, the tax implications of Bitcoin all depend on the circumstances in question. To further understand the taxation of Bitcoin, see here.
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Find a lawyerThe future of Bitcoin’s classification: El Salvador’s move for change
Although Bitcoin is not a foreign currency, or legal currency for that matter, it is still a legal form of money. This means that you are able to buy goods and services in Bitcoin, so long as the seller is willing to accept this form of payment.
However, Australia’s failure to recognise Bitcoin as a foreign currency could soon change due to El Salvador’s most recent legal reform. On 9 June 2021, the Parliament of El Salvador passed a world-first piece of legislation to make Bitcoin ‘legal tender.’ Making Bitcoin ‘legal tender’ means that all businesses must accept Bitcoin as a form of payment. El Salvador’s move to make Bitcoin a required form of acceptable payment comes into effect September 2021. This may have implications on Australia’s key finding that Bitcoin lacks legal adoption as a formal currency by non-Australian countries. This could soon change! Therefore, the legal implications of the El Salvador decision may be far-reaching.
Final thoughts
The Australian Commissioner of Taxation determined that Bitcoin is in fact not a foreign currency. This simply means that tax implications that arise from foreign exchange and foreign currencies do not apply to income received from Bitcoin. However, other rules of taxation will still apply. Interestingly, El Salvador’s move to make Bitcoin a formal currency via legal tender could see Australia recognising bitcoin as a foreign currency. This could mean that bitcoins classification may change in the future.
