Amidst the current hype on bitcoins, one key question arises: Do I have to pay tax for my bitcoin transactions? The short answer is ‘yes’, though this really depends on the purpose of your bitcoin transaction.
The purpose of this guide is to provide an overview of the tax treatment and implications of bitcoin transactions in Australia. While this guide is specifically directed towards bitcoin, it may also apply to other cryptocurrencies that share the same characteristics as bitcoin (such as ripple and ethereum). Regardless, it is recommended that you consult a tax lawyer or accountant who can give you more specific advice according to your circumstances. You can find and connect with tax lawyers through LawPath’s Lawyer Directory.
How does the ATO view bitcoin?
In the eyes of the Australian Taxation Office (ATO), bitcoin (and cryptocurrencies in general) is neither money nor foreign currency, and the supply of bitcoin is not a financial supply of goods for GST purposes (though GST may still apply for other reasons). Rather, bitcoin is regarded as an asset for capital gains tax purposes.
What transactions are not taxable?
Using bitcoins for personal transactions
Generally, there will be no income tax, GST or capital gains tax incurred if:
- You are using bitcoin to acquire goods or services for your own personal use and consumption (i.e. you must not be using bitcoin in the course of business or carrying on an enterprise), AND
- The bitcoin transaction is worth less than $10,000.
And that’s about it.
Even if your bitcoin transaction was for personal use and consumption, it may not necessarily fall within the $10,000 limit given the volatility of the bitcoin value. Therefore, in most cases, you could miss out on the tax free benefits solely because your bitcoin transaction does not technically qualify as being for ‘personal use or consumption’.
What transactions are taxable?
Tax applies to bitcoin transactions which were made for business and investment purposes (though deductions are usually available).
Using bitcoins for business transactions
Selling goods and services in return for bitcoins: GST applies to the supply of bitcoin earned in the course of selling your goods and services whilst carrying on a business. However, you may claim input tax credits on the GST charged on your earned bitcoins.
Buying business items with bitcoins: You are entitled to a deduction based on the arm’s length value of the business item acquired. GST is then payable on the supply of bitcoin made in the course or furtherance of your enterprise (i.e. when the business item which you acquired then generates more bitcoins for your business).
Capital gains: Capital gains tax may apply to the disposal of bitcoin in the course 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 and wages in bitcoin: If there is a valid salary sacrifice agreement for your employee to be remunerated in bitcoins (instead of Australian dollars), the payment of bitcoins would be deemed as a fringe benefit subject to the Fringe Benefits Tax Assessment Act. Otherwise, if there is no valid salary sacrifice agreement, the payment of bitcoin as remuneration is treated as normal salary or wages subject to your usual pay-as-you-go obligations.
Mining bitcoins: Mining is the process of your computer solving a complex puzzle for the purpose of verifying a transaction on the blockchain. A bitcoin(s) is then rewarded once your computer has successfully solved the puzzle (i.e. the bitcoin is ‘mined’).
If you are in the business of mining bitcoin, then the bitcoin generated will be treated as trading stock for end-of-year accounting purposes. GST is payable on the supply of bitcoin made in the course or furtherance of your bitcoin mining enterprise (though input tax credits are available). Any income derived from transferring your mined bitcoin to a third party would be included in your assessable income.
Using bitcoin for investment/exchange transactions
Exchanging bitcoins: Exchange means buying or selling bitcoins with or for Australian dollars ($A). The $A proceeds derived from the sale of bitcoin would be included in your assessable income. Any $A expenses incurred during the exchange service are allowed as a deduction. From 1 July 2017, GST will no longer apply to the sale and purchase of bitcoin. However, GST is still payable on bitcoin supplied by you in the course or furtherance of your exchange service enterprise.
Disposing of bitcoin acquired for investment: Capital gains tax apply to acquisition of bitcoin for investment purposes. If you are just an individual investor (i.e. not carrying on a business of bitcoin investment), then any profits made on the disposal of the bitcoin under a profit-making undertaking or plan would be included as assessable income. Otherwise, if you are carrying on a business of bitcoin investment, GST will apply to the supply or acquisition of bitcoins in the course or furtherance of your enterprise.
What should I do?
The ATO has advised bitcoin (and other cryptocurrency) owners to keep the following records:
- The date of the transactions.
- The amount in Australian dollars (which can be taken from a reputable online exchange).
- What the transaction was for.
- Who the other party was (even if it’s just their bitcoin address).
Despite the world entering into a new era of cryptocurrency transactions on the blockchain, at the end of the day, bitcoins are still considered as assets for Australian taxation purposes. However, the tax law on bitcoins is still in its infancy and is yet to be tested by the courts. Accordingly, it is highly recommended that you check out the official ATO guides as well as consult a tax lawyer via LawPath’s Lawyer Directory for more specific and certain tax advice with regards to your bitcoin transactions.
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