With the spectacular rise (and recent fall) of Bitcoins, Alt-Coins and other Cyrpto-currencies lets have a look at what the tax implications are of transacting in these assets.
The tax treatment is very similar to that of a share trader vs investor scenario so lets recap these specifically with Bitcoin in mind.
Purchasing Bitcoin as a personal investment
The ATO consider Bitcoin to be a CGT asset (TD 2014/26). This would be the default position unless the Bitcoin was purchased for furtherance of a business or as an isolated profit transaction (more on this below), which will then be treated as ordinary income.
Personal Investment, Income tax and GST
If you decide to acquire bitcoin as a personal investment, any gains you make on the sale of Bitcoin will be taxed under the CGT provisions. This will provide the taxpayer with concessional CGT treatment where the 50% CGT discount will be available if the Bitcoin investment is held for more than 12 months. Similarly where losses are made as an investment the Bitcoin investment would be treated as a capital loss and be available to offset against current and future capital gains.
There will be no GST consequences for you where the bitcoin transaction is not a supply or acquisition in the course of furtherance of an enterprise.
Where the ATO ruling gets interesting is where it comments on Bitcoin potentially being a personal use asset. This is interesting as any personal use assets which were acquired for less than A$10,000 any capital gains are disregarded for tax purposes (as well as any capital losses i.e. capital losses cannot be claimed or offset). To satisfy this criteria the Bitcoin would have to be used and exchanged for personal use assets (i.e. not sold for cash or exchanged for any other investment assets). The example the ATO uses refers to “clothing or music”, however it could be quite conceivable where someone was using Bitcoin to regularly purchase products and they were to make a significant gain (could be conceivable late last year due to the hyper appreciation of Bitcoin) to have exchanged Bitcoin for a boat or sport car for this transaction to be CGT free under the personal use asset provision. One would have to consider the prior pattern of using Bitcoin to purchase other personal use assets to be key to receiving this tax exemption.
Beware, however, that whether or not you’re carrying on a business, and whether or not an acquisition or supply is in the course of furtherance of an enterprise, depends on a number of subjective factors. The factors involved in determining whether you are carrying on a business or the furtherance of an enterprise also differ, which means you could be subject to the GST regime and not the income tax regime and vice versa. It is best to consult us to find out about your individual situation and to ensure that any bitcoin activities are not captured under the income tax or GST regimes.
Purchasing Bitcoin as a Business
Buying and selling bitcoin as a business
What about if you decide to go big and start a business of buying and selling bitcoin?
According to the ATO, the proceeds you derive from the sale of bitcoin are included in your assessable income and any expenses incurred are allowable as a deduction.
The bitcoin in this situation is very similar to that of a share trader where the bitcoin is treated as trading stock. Any sales of bitcoin are treated as revenue and any purchases of bitcoin are treated as purchases as cost of goods sold. At the end of the financial year you are required to bring to account any bitcoin on hand at the end of each income year. With the closing stock amount, the taxpayer would be able to choose cost, market or replacement value (in this case would be the same as market value) to determine the value of closing stock at year end.
If you are running a business and your turnover is $75,000 or more, you will normally be required to register for GST. However, bitcoin is considered to be an input taxed sale, which is not included in GST turnover. If combined with other business activities the total turnover of all business activities would need to be considered. Hence, if your business consists solely of making sales of bitcoin, you would not need to register for GST. Although you may still choose to register taking into consideration such factors as being able to claim reduced GST credits in certain circumstances, and other taxable sales or creditable purchases you may make.
After considering whether you are an investor or in the business of buying and selling bitcoin, the structure which you are operating will determine how the capital gain or profit is taxed.
If you are undertaking the activities in your personal name and investor would include the capital gain in their personal tax return and possible reduce the capital gain by 50% if the Bitcoin investment has been held for more than 12 months. The net capital gain is added to your other income and assessed at your marginal rates.
In the event you are in the business of buying and selling Bitcoin, if these activities are undertaken in your personal name, the profit or loss is included as business income. Where there is a profit this amount would be added to your other taxable income and taxed at marginal rates. Remember to claim for the small business tax offset in this case.
In the event you incur a loss in your personal name it may be possible for you to deduct this loss against your other income, in order to deduct the loss you would need to satisfy the non commercial loss rules, you will need to consider whether you other income is less than $250,000 and then should be able to apply the assessable income test if your bitcoin business made turnover of more than $20,000.
Where you are conducting a business of buying and selling bitcoin, strong consideration should be given to conducting these activities in a company due to the flat tax rate of 27.5%. Any profits in the company will be taxed at a flat rate of 27.5% which is lower than all marginal tax rates where income is above $37,000. If you need to access the profits this can be done by a dividend where you will receive franking credits as well as the small business tax offset. The only downside of this structure is the losses are quarantined within the company structure and can’t be offset against your personal income. The losses can be carried forward though and offset against future profits of the company.
You may have heard that bitcoin can be mined. The process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle with the participant who solves the puzzle first claiming a set amount of bitcoin. Anyone in the business of mining bitcoin would have to include income derived from the transfer of the mined bitcoin to a third party. The expenses related to the mining activity would be allowed as a deduction. Note that according to the ATO, the non-commercial loss provisions may apply to limit the losses you can claim from the bitcoin mining activity against other income. Again, the mined bitcoin would be considered to be trading stock and there may also be GST consequences in relation to the supply of bitcoin.
Using bitcoin in transactions
Where you use bitcoin for business transactions, such as providing goods or services in return for bitcoin, you need to record the value in Australian dollars as a part of your income. This value is fair market value and should be obtained from a reputable bitcoin exchange. You will also be required to remit GST as 1/11th of the payment received for any taxable sale. This will need to be reported on your activity statement and the amount reported has to be in Australian dollars. When you purchase business items using bitcoin, you may be entitled to a deduction based on the arm’s length value of the item acquired. In addition, using bitcoin as a method of payment incurs the same GST consequences as using money as payment, that is, there will be no GST.
You could even use bitcoin to pay employees’ salary and wages. In instances where an employee has a valid salary sacrifice arrangement with you as the employer to receive bitcoin as remuneration instead of Australian dollars, the payment may be subject to fringe benefits tax (FBT). However, where a valid salary sacrifice agreement does not exist, the remuneration is treated as normal salary and wages and you as the employer will need to meet PAYG obligations.
The tax determination only relates to actual Bitcoin and/or Cryptocurrency transactions and does not extend to derivatives of crytpocurrencies. Any investment in derivatives would follow the normal rules which would apply to financial instruments and would need to be considered separately from the tax determination.
Want to know more?
Understanding Bitcoin and cyrptocurrencies alone and how they operate is a complex matter. The taxing of these transactions are also complex. Given the huge volatility in price and potential for significant gains and losses, significant consideration would need to be given to the tax outcome of these transactions, especially where a taxpayer is considering investing or trading in cyrptocurrencies over the longer term.
This article was featured in our February 2018 newsletter publication.