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Author Topic: Capital Gains Tax on Bitcoin and definition of a Bitcoin in Australia (Equity)  (Read 3205 times)
dadj
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February 08, 2013, 01:47:22 PM
 #1

CGT Assets are defined in s 108-5 of the Income Tax Assessment Act 1997 as "any kind of property" or "a legal or equitable right that is not property."

As put forward in my other thread, https://bitcointalk.org/index.php?topic=141636.0 I believe the definition of Bitcoin as an asset is wrong.

Bitcoin as a CGT asset also seems wrong to me.
Quote
INCOME TAX ASSESSMENT ACT 1997 - SECT 108.5

CGT assets
             (1)  A CGT asset is:

                     (a)  any kind of property; or

                     (b)  a legal or equitable right that is not property.

             (2)  To avoid doubt, these are CGT assets :

                     (a)  part of, or an interest in, an asset referred to in subsection (1);

                     (b)  goodwill or an interest in it;

                     (c)  an interest in an asset of a partnership;

                     (d)  an interest in a partnership that is not covered by paragraph (c).

Note 1:       Examples of CGT assets are:

*          land and buildings;

*          shares in a company and units in a unit trust;

*          options;

*          debts owed to you;

*          a right to enforce a contractual obligation;

*          foreign currency.

Bitcoin is technically not a currency as defined by ISO though that may change in the future.
I think it's safe to say bitcoins are not any kind of property as they are more like a distributed digital file or a virtual key.

Bitcoin an equitable right? Well there's certainly no legal right given to someone with a bitcoin.

From Wikipedia on equitable right:
Quote
An equitable right is a legal right guaranteed by equity as opposed to a legal right which derives authority from a legal source.

From Wikipedia on equity law:
Quote
Equity was developed two or three hundred years after common law as a system to resolve disputes where damages are not a suitable remedy and to introduce fairness into the legal system.

I don't think Bitcoin will be defined as an equity given that the current legal system has shown no interest in defining what a bitcoin actually is, let alone affording protection to victims of fraud via bitcoin payments.

For further reading on equity search for "maxims of equity".

Do you think Bitcoin could be defined as an equity or that equity law could apply to Bitcoin?

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February 09, 2013, 12:47:27 AM
 #2

I haven't looked through your other topic yet, so I apologize for any ignorance in my response here. I'm also in the States, so I don't have a lot of tax knowledge related to AU.

Quote
INCOME TAX ASSESSMENT ACT 1997 - SECT 108.5

CGT assets
             (1)  A CGT asset is:

                     (a)  any kind of property; or

                     (b)  a legal or equitable right that is not property.

             (2)  To avoid doubt, these are CGT assets :

                     (a)  part of, or an interest in, an asset referred to in subsection (1);

                     (b)  goodwill or an interest in it;

                     (c)  an interest in an asset of a partnership;

                     (d)  an interest in a partnership that is not covered by paragraph (c).

Note 1:       Examples of CGT assets are:

*          land and buildings;

*          shares in a company and units in a unit trust;

*          options;

*          debts owed to you;

*          a right to enforce a contractual obligation;

*          foreign currency.

Based on this tax code you posted, BitCoin might qualify as a CGT asset. I'm looking at their examples of CGT assets that lists debts owed to you and foreign currency. Debt owed caught my attention since it could imply that something doesn't have to be a physical asset to qualify as a CGT asset. You brought up that BitCoin wouldn't be property since it's a digital file, but being a digital file may not disqualify it from being an asset. Debt owed is not a physical asset until payment has been received, but it's still an asset since it has a monetary value tied to it. BitCoin could, in essence, be the same thing: it's a digital representation of defined monetary value, which could mean it's an asset.

The foreign currency thing caught my attention since, like you said, the status of BitCoin as a currency could change. I don't know how AU would interpret it's current status, but it may try to argue it as a taxable currency when it comes to getting more tax revenue.
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February 09, 2013, 02:24:03 PM
 #3

Based on this tax code you posted, BitCoin might qualify as a CGT asset.
Sorry to nitpick here but just for your information the correct capitalisation is Bitcoin

I'm looking at their examples of CGT assets that lists debts owed to you and foreign currency. Debt owed caught my attention since it could imply that something doesn't have to be a physical asset to qualify as a CGT asset. You brought up that BitCoin wouldn't be property since it's a digital file, but being a digital file may not disqualify it from being an asset.

Debt owed is not a physical asset until payment has been received, but it's still an asset since it has a monetary value tied to it. BitCoin could, in essence, be the same thing: it's a digital representation of defined monetary value, which could mean it's an asset.
I think you are correct in stating that Bitcoin will be legally defined as something with defined monetary value / an asset. However I come to the conclusion that currently there is no legal definition for Bitcoin as an asset because there is no asset class that it belongs to. The monetary value of a Bitcoin at any time is difficult to define and there are no set reporting requirements stating which method of pricing to use, how frequently records need to be updated, taxation issues and an array of other legal / tax / accounting questions.

The foreign currency thing caught my attention since, like you said, the status of BitCoin as a currency could change. I don't know how AU would interpret it's current status, but it may try to argue it as a taxable currency when it comes to getting more tax revenue.
I think you're right, but for the Bitcoin to be considered a taxable currency, I think we would need to see it adopted as such by ISO with appropriate standardisation.

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February 12, 2013, 03:18:34 AM
 #4

in the UK bitcoins are a personal possession, such as art, antiques, cars etc. so look into that area of tax law.

heres a link to my topic on UK tax stuff
https://bitcointalk.org/index.php?topic=143425.0

and see which bits may be useful when asking the accountants in your native countries

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February 12, 2013, 03:38:44 AM
 #5

I think you are correct in stating that Bitcoin will be legally defined as something with defined monetary value / an asset. However I come to the conclusion that currently there is no legal definition for Bitcoin as an asset because there is no asset class that it belongs to. The monetary value of a Bitcoin at any time is difficult to define and there are no set reporting requirements stating which method of pricing to use, how frequently records need to be updated, taxation issues and an array of other legal / tax / accounting questions.

According to a CPA that I have spoken to about this you are only really going to have to worry about paying tax when you convert your BTC back into dollars - at that point (in the same way as using the "simple" method of accounting for buying and selling stock) you will have made (or lost) dollars according to the % of units (BTC) that you have sold (thus if you bought 1 BTC at $1 and now sold 0.5 BTC for $10 then you have just made a CG of $9.50).

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dadj
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February 16, 2013, 05:49:47 AM
 #6

in the UK bitcoins are a personal possession, such as art, antiques, cars etc. so look into that area of tax law.

heres a link to my topic on UK tax stuff
https://bitcointalk.org/index.php?topic=143425.0

and see which bits may be useful when asking the accountants in your native countries
The legal definition of Bitcoin is far from clear. I am sure that the closest resemblance to a legal definition in Australia would be a collectable, which under the Income Tax Assessment Act covers many of the same things as UK law defines as personal possessions (art, jewellery, coins etc.).

However, your assumption that the CGT tax wouldn't apply to bitcoins as they fall under the threshold would not apply under Australian CGT law because from the INCOME TAX ASSESSMENT ACT 1997:
Quote
Collectables acquired for $500 or less are exempt. However, you get an exemption for an interest in one only if the market value of all the interests combined is $500 or less: see Subdivision 118-A.

As there are a pre-determined amount of bitcoins and many people collect them because of their rarity/scarcity we can probably safely assume that Bitcoin may be interpreted to be a collectable.

I think you are correct in stating that Bitcoin will be legally defined as something with defined monetary value / an asset. However I come to the conclusion that currently there is no legal definition for Bitcoin as an asset because there is no asset class that it belongs to. The monetary value of a Bitcoin at any time is difficult to define and there are no set reporting requirements stating which method of pricing to use, how frequently records need to be updated, taxation issues and an array of other legal / tax / accounting questions.

According to a CPA that I have spoken to about this you are only really going to have to worry about paying tax when you convert your BTC back into dollars - at that point (in the same way as using the "simple" method of accounting for buying and selling stock) you will have made (or lost) dollars according to the % of units (BTC) that you have sold (thus if you bought 1 BTC at $1 and now sold 0.5 BTC for $10 then you have just made a CG of $9.50).

The problem is that according to the INCOME TAX ASSESSMENT ACT 1997:
Quote
108-10(2)  

A collectable is:


(a) *artwork, jewellery, an antique, or a coin or medallion; or


(b) a rare folio, manuscript or book; or


(c) a postage stamp or first day cover;

that is used or kept mainly for your (or your *associate's) personal use or enjoyment.

108-10(3)  

These are also collectables:


(a) an interest in any of the things covered by subsection (2); or


(b) a debt that arises from any of those things; or


(c) an option or right to *acquire any of those things.
we can see that Bitcoin clearly does not fit into any of these criteria. Therefore, I propose that selling a collectable which is not defined in this act (even for a profit) would not be subject to any CGT tax.

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March 15, 2013, 02:33:37 PM
 #7

"equity law could apply to Bitcoin"

equity (law) is not the same as equities.....

equity (law) is about doing justice in the case despite the common law (sort of) sic. giving judges wiggle room


equities are a form of asset...

LLB(UNSW).

I am also thinking of starting a bitcoin/crypto law practice....the case is going to come!!!!!

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March 22, 2013, 01:43:40 PM
 #8

You dont actually own bitcoins.

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March 23, 2013, 01:30:39 AM
 #9

I paid for some advice recently on tax for BTC in Aust, the basic run down was tax only applies when you cash back to fiat then the first 50% is not taxed and you are taxed on the other 50% depending on your circumstances of how you are set up.
This advice was not given as concrete either. I  am either going to set a company up and buy all that I need that way (real estate) so its a company problem tax wise and not personal income which should make any tax liability smaller if done right, I have paid shit loads of tax through my life already.
Disclaimer I am in no way knowing in these matters and just trying to work out the best deal I can get for myself if it comes to actually needing fiat from my BTC.
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March 23, 2013, 03:55:42 AM
 #10

I paid for some advice recently on tax for BTC in Aust, the basic run down was tax only applies when you cash back to fiat then the first 50% is not taxed and you are taxed on the other 50% depending on your circumstances of how you are set up.
This only applies if you sold your coins more than 12 months after your purchased them. If it's less than 12 months, the full amount is taxable. Also, it's not just trading bitcoins for fiat that counts: trading bitcoins for anything counts as a "realisation event" and you have to pay tax on the fair market value (eg, if you use your bitcoins to buy $1000 worth of widgets, that's exactly the same as if you just sold those bitcoins for $1000). The only difference is that when trading for fiat, the fair market value is easy to figure out, since a dollar is always worth exactly $1.

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March 23, 2013, 09:44:06 AM
 #11

My definition of Bitcoin is "goods", "digital goods" to be precise.

That's what I say to the reasonable parties who politely ask (the rude questions I simply ignore, and there is nothing illegal in doing that)

If they disagree, I leave them to come up with their own definition, then wait patiently.

In my opinion, Bitcoin is similar to SSL certificate (very popular digital good), so one can look and learn from that legality.

As no one owns the Bitcoin "certificate authority" (being distributed in nature), one cannot possibly value or trade shares in organisation.

But the individual Bitcoins (the equivalent of the SSL certificates) can be traded or used as a store of value at will.

Note that Bitcoin is dissimilar to MP3 songs or music videos (other popular digital goods), luckily the onus to ensure correct definition does not rest with me but with whoever needs it.

I think it is foolish to lay all these unsubstantiated claims that Bitcoin is a currency. I know it is a popular believe, but I still found it erroneous and unsubstantiated.
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March 25, 2013, 10:05:49 AM
 #12

IANAA, but I think anyone who tries to argue that Bitcoin falls through the cracks of tax law will find themselves very quickly disabused of that notion by the army of lawyers that the ATO has at its disposal.

I see it this way - you bought something, and then later you sold it.  Either you made a profit or you didn't.

If you made a profit, then your gains are taxable (either as income or capital gains).  Of course, if you made a taxable profit then any costs associated with making that profit can be offset against that profit (capital costs - miners, electricity, trading losses).

Now practially, if you bought a dozen Bitcoins at $2 and sold them the other day at $60, there is a good chance your accountant would laugh at you if you tried to declare the income.

However if you bought BTC10k at $0.01 a few years ago (as I wish I had) and sold them yesterday at $60, you'd be playing a dangerous game if you tried to pretend you didn't have any profit to declare to the ATO.

Just my 2 Satoshi's worth.

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May 24, 2013, 05:15:14 PM
 #13

You dont actually own bitcoins.

Exactly,

Can we start a thread on the real asset.... its a type of property right for a "bitcoin" its a private key that you own...

Thanks,

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May 25, 2013, 12:24:01 AM
 #14

CGT Assets are defined in s 108-5 of the Income Tax Assessment Act 1997 as "any kind of property" or "a legal or equitable right that is not property."

As put forward in my other thread, https://bitcointalk.org/index.php?topic=141636.0 I believe the definition of Bitcoin as an asset is wrong.

Bitcoin as a CGT asset also seems wrong to me.
Quote
INCOME TAX ASSESSMENT ACT 1997 - SECT 108.5

CGT assets
             (1)  A CGT asset is:

                     (a)  any kind of property; or

                     (b)  a legal or equitable right that is not property.

             (2)  To avoid doubt, these are CGT assets :

                     (a)  part of, or an interest in, an asset referred to in subsection (1);

                     (b)  goodwill or an interest in it;

                     (c)  an interest in an asset of a partnership;

                     (d)  an interest in a partnership that is not covered by paragraph (c).

Note 1:       Examples of CGT assets are:

*          land and buildings;

*          shares in a company and units in a unit trust;

*          options;

*          debts owed to you;

*          a right to enforce a contractual obligation;

*          foreign currency.

Bitcoin is technically not a currency as defined by ISO though that may change in the future.
I think it's safe to say bitcoins are not any kind of property as they are more like a distributed digital file or a virtual key.

Bitcoin an equitable right? Well there's certainly no legal right given to someone with a bitcoin.

From Wikipedia on equitable right:
Quote
An equitable right is a legal right guaranteed by equity as opposed to a legal right which derives authority from a legal source.

From Wikipedia on equity law:
Quote
Equity was developed two or three hundred years after common law as a system to resolve disputes where damages are not a suitable remedy and to introduce fairness into the legal system.

I don't think Bitcoin will be defined as an equity given that the current legal system has shown no interest in defining what a bitcoin actually is, let alone affording protection to victims of fraud via bitcoin payments.

For further reading on equity search for "maxims of equity".

Do you think Bitcoin could be defined as an equity or that equity law could apply to Bitcoin?

It may not be an equitable right because no one is in anyway obligated to give you anything for a bitcoin, nor promised in anyway you would receive anything

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May 25, 2013, 12:34:15 AM
 #15

IANAA, but I think anyone who tries to argue that Bitcoin falls through the cracks of tax law will find themselves very quickly disabused of that notion by the army of lawyers that the ATO has at its disposal.

Correct. Clearly the closest definition is "foreign currency". It is trivial for the ATO to issue guidance that this has always meant "virtual/internet" currency as well. Even if someone got as far as a courtroom argument the clause could be amended by parliament in a forthcoming budget to put the matter beyond doubt.

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May 25, 2013, 01:38:49 AM
 #16

IANAA, but I think anyone who tries to argue that Bitcoin falls through the cracks of tax law will find themselves very quickly disabused of that notion by the army of lawyers that the ATO has at its disposal.

Correct. Clearly the closest definition is "foreign currency". It is trivial for the ATO to issue guidance that this has always meant "virtual/internet" currency as well. Even if someone got as far as a courtroom argument the clause could be amended by parliament in a forthcoming budget to put the matter beyond doubt.

I wouldn't be at all surprised to find exactly this happening sooner rather than later.  Treating it as a foreign currency for tax purposes not only fits existing law well, it also makes most sense.

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