by Joanne Masters

In this third article in our series, currency expert Jo Masters looks at the future of the bitcoin here in Australia.

Policymakers globally are struggling with the bitcoin and, in particular, how to capture the bitcoin into existing tax and regulatory structures. As we’ve discussed, this is a critical path of the ‘coming of age’ of the bitcoin, but one that needs to be walked carefully.

Indeed, we wonder whether regulation of the bitcoin will provide the legitimacy it needs, or be the curse that kills an infant idea.  For example, one advantage of the bitcoin at present is the lack of transaction costs, but this could be lost if too much regulation is imposed. On the other hand, some regulation is needed to provide investors with sufficient safeguards to allow the bitcoin to establish a store of value.

The issue of regulation and taxation of bitcoins is relevant around the world. There is no right or wrong way forward, particularly given how rapidly the market itself is developing. At present, there is little (no?) global consistency.

In the US, the Supreme Court has recognised the bitcoin as ‘legal tender’, and the IRS is treating the bitcoin as ‘property’ (or like a stock) making it subject to capital gains tax.

The UK reversed a decision to apply VAT to bitcoins, but is continuing to charge corporate and income tax.  Singapore has classified bitcoins as goods rather than currency, and thus is subject to GST. In Germany, the bitcoin has been defined as ‘private money’ leaving it subject to CGT and VAT.

Russia has declared bitcoin transactions illegal, while China has banned its banks from handling bitcoin trades.

In Australia, ASIC has bitcoins on its regulatory radar, while Treasury has no plans to acknowledge bitcoins as legal tender. The bitcoin is not covered by the Anti-Money Laundering and Counter-Terrorism Financing Act because it is not backed directly or indirectly by precious metal or bullion. Australia’s big four retail banks are not engaging digital currencies.

The ATO has been consulting with relevant institutions, including the Australian Bankers Association, the Law Council, Bitcoin advocate groups. Guidelines on how bitcoins are to be treated for taxation purposes were due to be released by 30 June 2014 but have just been postponed.

A private ruling on the issue earlier this year confirms the ATO’s intention to tax bitcoins. Indeed, the ruling confirmed that income and profits derived from bitcoin transactions are taxable. In particular, that GST is applicable when transferring bitcoins to another party and that bitcoin profits are subject to CGT (although deductions are on an individual case basis).

There appears to be four main approaches under consideration by the ATO:

  1. Treat the bitcoin as a currency: bitcoins converted into A$ would generate a taxable gain or loss.
  2. Treat the bitcoin like property, leaving it subject to CGT (although a key issue with this option is how to value bitcoins that are mined, and how to treat potential deductions).
  3. Treat the bitcoin as a ‘right.’
  4. Not taxing bitcoins.

All four approaches entail complexities, and international experience shows that it is not a simple problem with a simple solution.