Bitcoin- the fuss isn’t just about the price!
With all the fuss going on at the moment about the price of Bitcoin hitting $US 11,000, I thought I might use the opportunity to talk a little about the tax implications that might arise from "dealing” in Bitcoins.
First, a little background. Bitcoin is just one type of cryptocurrency. As at September 2017, there were some 1,100 different cryptocurrencies in existence. Bitcoin was then, and still is, the biggest. As at November 2016, Bitcoin had a market capitalisation of $US 11.3 billion.
The other main cryptocurrencies include Ethereum ($875 million); Ripple ($288 million), Litecoin ($183 million) and Monero ($94 million).
A cryptocurrency like Bitcoin is an unregulated "currency” that is accepted by those in the Bitcoin tent, with each transaction being registered on a shared public ledger called a "block chain”. All transactions are included in the block chain. Each participant has a Bitcoin wallet that tells you how much you still have, just as when you open your real world physical wallet you can see how much currency you still have.
To give some context, in early 2015 a Bitcoin was worth $US 300 – so many have made a lot of money - some real; some only paper at this stage.
So while the fuss is all about the meteoric price rise, a deeper and more compelling question for us is the fuss about what are the likely tax consequences if you make money from a "dealing” in Bitcoin (or any other cryptocurrency for that matter).
There are a number of possibilities:
- If you purchase purely as a speculator (ie because you think you can make money out of it) – it’s a revenue asset and any gain is taxed at marginal rates up to 45% as ordinary income.
- If you purchase Bitcoin as a business asset with the intention of trading it like inventory, it is trading stock and taxed as such.
- If you purchase for less than $A10,000 and purely for personal consumption (i.e. only to use it to buy products from others in the tent) it is treated as being a personal use asset bought on capital account. Any gain is exempt from tax.
- If you purchase for more than $A10,000 and purely for personal consumption it is treated as being a personal use asset bought on capital account. If held for at least 12 months, only half the capital gain will be included as assessable income.
- If you purchase as a long term investor to hold as capital (which would seem unlikely as no income flows from holding Bitcoins) – it is a capital asset and any gain is taxed as a capital gain.
In such a case:
- If you purchase in an individual name - a 50% discount will apply. Hence only half the gain will be taxed at relevant marginal rates
- If you purchase in the name of a superannuation fund - a 33.5% discount will apply. Hence only two thirds of the gain will be taxed at 15%.
Clearly what matters most particularly is the intention at the time of purchase – this should, as with all "investments”, be contemporaneously documented in clear and unambiguous terms at the time of purchase. If the intention changes that too should be documented in a similar way.
Two further questions follow:
- Is cryptocurrency a foreign currency for foreign currency realisation purposes and if so what are the implications? and
- What are the GST implications of cryptocurrency dealing?
All these issues are canvassed in more detail in an upcoming article by Nathan De Zilva, PwC Australia on cryptocurrencies which will appear in The Tax Institute’s Taxation in Australia journal early in the new year. It is also worth looking at Taxation Determination TD2014/26 regarding Bitcoins and Capital Gains Tax and Goods and Services Tax Ruling GSTR 2014/3 regarding Bitcoins and GST.
The Tax Institute’s Senior Tax Counsel, Professor Bob Deutsch’s article on bitcoin was first published for TaxVine®, the Institute’s flagship, member-only weekly newsletter containing all the latest tax news and research. To receive TaxVine®, join up as a member with The Tax Institute. Find out more on our website.
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