Bitcoin: What are the Income Tax consequences?

There has been plenty of press coverage on digital currency, specifically bitcoin, but what are the tax consequences if you decide to join the craze? Well, that depends on whether you are running a business, or if you are acquiring digital currency for personal investment. Here we examine the tax effects if you choose to invest in digital currency.

Some examples of digital currencies include Bitcoin, Ethereum, Litecoin, Dash, Monero, ZCash, Ripple, YbCoin.

Income tax and GST

If you decide to acquire a bitcoin as a personal investment, provided you are not carrying on a business of bitcoin investment, you will not be assessed on any profits resulting from the sale. Conversely, you will not be allowed any deductions for any losses made in relation to your bitcoin investment. In addition, 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.

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.

Using bitcoin for purchases

Bitcoin is not only for investment purposes and some people use it in the same way as one would use money.

Where you have bitcoin and you use it to purchase goods or services for personal use, capital gains or losses from the disposal of bitcoin will be disregarded provided the cost of the bitcoin is $10,000 or less.

Where the cost of bitcoin is $10,000 or more, there may be CGT consequences on disposal and you need to keep records including the:

  • date of the transaction;
  • amount in Australian dollars sourced from a reputable online exchange;
  • purpose of the transaction (ie, what it was for); and
  • other party’s details (if no other details are available, the bitcoin address would be sufficient).

Buying and selling bitcoin as a business

What about if you decide to go big and start a business of buying and selling bitcoin?

The bitcoin in this situation is treated as trading stock and you are required to bring to account any bitcoin on hand at the end of each income year.

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. 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.

Mining bitcoin

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.

Capital Gain Tax consequences

Where you carry on a business and dispose of bitcoin as a part of that business, there may be capital gains tax consequences. However, the capital gain may be reduced by the amount that is included in the business’ assessable income. The ATO requires records to be kept for such transactions, including the date of the transaction, the amount in Australian dollars taken from a reputable online exchange, the purpose of the transaction and details of the other party to the transaction.

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.

How will ATO keep track?

The ATO has access to data matching already and they can gain access to bank accounts to look for transactions relating to payments made or received, for example to trace purchases of property or luxury cars.

It has been reported recently that the ATO has created a specialist task force to identify and track cryptocurrency transactions and counter tax evasion in this area. The ATO will work closely with banks but it also has a team of experts on hand, including tax experts, lawyers, financial advisers and technology specialists.

Want to find out more?

If you would like to find out more about the specific tax and GST consequences for your digital currency business, talk to us today.