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Author Topic: Australia Taxation Rules  (Read 2870 times)
PirateHatForTea
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December 08, 2013, 06:31:15 PM
 #1

So despite the ATO being aware and even commenting on Bitcoin, there is NO guidance whatsoever about how it is classed for the purposes of taxation. I've created this thread to lay out my thinking, and seek support from other Aussie Bitcoin users.

Also, ultimately the only way we are likely to gain clarity regarding Bitcoin taxation is to seek a private ruling from the ATO, so this thread also exists to solicit volunteers to request suck a ruling, or other possible vehicles to get a ruling, such as eg a non-profit foundation such at the Australian Bitcoin Assocation petitioning the ATO for a ruling.


The way I see it there are several complications regarding Bitcoin and taxation in Australia. They are:
  • How to categorize Bitcoin for tax purposes?
  • What does this mean for tax accounting? (Eg CGT, FIFO accounting vs fungible units)
  • What are the implications of mining BTC?
  • What are the implications of using BTC like a currency (eg to denominate other assets!)

I'm going to deal with these one at a time.

How to categorize Bitcoin for tax purposes?

This is the first big question that needs to be answered, and I can think of two possible responses:
  • Bitcoin is treated as a capital asset (security, commodity or collectible), and falls under the CGT rules (including 50% discount if held > 1year)
  • Bitcoin is treated as a foreign currency, and falls under the rules for foreign currency

I think it is more sensible to treat Bitcoin as a capital asset, and that this is the more likely outcome anyway based on the direction taken in the USA, China and Germany. However this creates some headaches when we come to cases where we treat Bitcoin like a currency, especially in the case of BTC-denominated securities such as those issued on crypto stock exchanges.

What does this mean for tax accounting?

The capital asset case is easy enough to understand:
Capital assets include shares and units, collectables & commodities, assets for personal use (eg boat, car) and other assets (such as an investment
property, vacant land or a holiday home). For a bunch of reasons I think that Bitcoin is better suited to being considered a capital asset, and is similar to a commodity, especially when you consider:
  • Bitcoin has no counterparty risk, you physically (virtually?) hold the bitcoin just as you can gold (contrast with foreign-denominated bank account)
  • Although its envisaged use is as a currency, so far it is acting more like a store of value
  • Large capital gains have been possible with BTC - the tax treatment of foreign currency doesn't really expect or account for this

If Bitcoin is a capital asset, then capital gains from the purchase and sale of Bitcoins are assessable (capital losses can be used to offset capital gains but losses are not themselves deductible, unless you are deemed to trade for a living).

But, the good news is that capital gains on bitcoins held for longer than 12 months may be subject to a 50% reduction of the amount of the capital gain (aka a discount). HOW to determine whether you've held a Bitcoin for > 12 months then becomes a little important. I can envisage 3 possibilities:
  • Bitcoins are considered to be like shares or units, and we can identify however we want which bitcoins were the 'purchased units' corresponding to the 'sold units', as they are fungible.
  • Bitcoins are considered to be something else, and we must use FIFO accounting to determine how long a coin is held for.
  • Bitcoins are considered to be something else, and there is no clear guidance on how to determine how long a coin is held for

It's worth noting that as in the case of share traders, if the ATO determines that you are carrying out a business that consists of the act of buying selling shares (Bitcoin), you will not be eligible for the 50% discount.

I'd expect Bitcoin's CGT treatment to be similar to gold - you can find a good article on that here.


The foreign currency case may be a bit more complicated, but not terribly so:
If the ATO decides that BTC is a foreign currency (unlikely IMO) then gains and losses incurred are assessable or deductible under the rules.

Calculating gains and losses means assigning a corresponding buy-in price to each sell-out price of your bitcoins, and because we're dealing with fungible units there's many ways to do this. The ATO allows two ways for foreign currency:
  • First-in, First-out accounting - This is probably the simplest way to calculate things, and the most relevant for bitcoin. Sales are assigned to the earliest purchase that has not yet been sold, so when you sell, the gain is sale price minus the purchase price for the earliest-bought bitcoins you have not yet sold.
  • Weighted Average Basis - As I understand it, this uses either the average acquisition costs for the currency a) to-date or b) for the entire year as the purchase price. Note that one has to specifically elect to use this method, in writing (presumably on one's tax return)

This is fairly simple, and would simply mean that your BTC profits are considered income, and added to your other assessable income. Things get complicated if we start denominating assets in BTC as well, but there are at least rules for how to handle this if BTC falls under the rules for foreign currency. We'll deal with that later though.

What are the implications of mining BTC?

Ok, so let's assume that Bitoin is a commodity, as dealing with a situation where miners mint a currency under ATO rules is going to make my head hurt.

First of all, let's deal with the easy stuff  - I think running a mining operation, even a small one, will be considered to be 'running a business', especially if you run a profitable mining operation. Those hoping to write their mining income down as hobby income are likely to have a bad time (of course, given that mined coins are fresh with no trails/traces to you, whether you ought to mention/declare mining income is another matter, especially if you don't convert to fiat via exchanges - this is a personal choice I leave to miners but I am personally not planning to take the route of tax avoidance).

The up side of this is that you can write off that $5000 mining rig on your tax as a deductible expense! Of course, until you mine some coins and sell them for fiat, the business doesn't have any income for that deduction to offset, but you can always carry forward the loss and use it to offset future gains.

However, because your business is producing and selling bitcoin, I don't think that the bitcoin in question will be eligible for the 50% capital gains tax discount. This is because as in the case of being a share (bitcoin) 'trader' rather than investor, the bitcoin in question become trading stock rather than capital assets.

There's also this passage from the ATO page about the 50% discount:
Quote
If you make a capital gain from a CGT event that creates a new asset you cannot satisfy the 12-month ownership rule, so your CGT event does not qualify for the CGT discount.

In short, if you mine, I don't think you can take advantage of the 50% discount for holding > 12 months, but you CAN deduct all your mining costs and expenses.

What are the implications of using BTC like a currency (eg to denominate other assets!)

OK, so this is where things get really freaking weird. How do we deal with assets that are denominated in BTC? I'm thinking here mainly of shares, like those of ASICMiner or (*shudder*) Labcoin. The answer probably depends on whether we decided Bitcoin fell under the capital asset rules, or the foreign currency rules. Let's look at both:

Bitcoin is foreign currency:

Actually if we go down this path, then BTC-denominated purchase and sale of assets already has clear rules and I don't get a headache.

Bitcoin is a commodity:

OK, so this one raises lots of questions, like:
  • If I make a BTC loss, but the price of BTC goes up, how do I calculate the gain?
  • If I sell BTC-denominated shares, is that a capital gains event? Or does it only become a capital gain if I sell for fiat?
  • What accounting method do I use for calculating the capital gain for the asset, AND for the underlying bitcoin?

This is murky water indeed. There are two places we can look to for some (but not much) illumination:

Well, that turned out WAY longer than I was planning, but it has helped me organize my thoughts, and I hope it has helped you all a little too. I'd really appreciate any feedback or discussion, and especially input from accountants, lawyers or tax professionals.

I am not an accountant or lawyer, but if you feel that this post has helped you, BTC tips are most welcome: 19FEYMon5yYEJdqm5RUbzS9cn9iw3cfScm

Unlevereged financial instruments acting as a store of value that fluctuate 50% within 10 minutes is perfectly acceptable. I think it should be offered in IRA form to soon to be retirees.
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simonk83
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December 09, 2013, 06:45:04 AM
 #2

My stance at this stage is to simply do nothing, and hence as there's no ruling either way, we can't really be taxed come June Smiley

Don't draw attention to it I say Cheesy
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December 10, 2013, 03:41:36 AM
 #3

Thanks for writing that up.

Having regulations would provide some certainty for business, and in that case I agree with you that the best way to treat bitcoins is as an asset similar to gold.

Having said that, bitcoin really does not fit into any of these regulatory boxes. Furthermore it is still in its very early stages and there will be developments and applications that we can not think of now.

I like the analogy, that if ocean liner regulations were applied to airplanes, we would not have the airline industry that we have now.

Rushing in with regulations on bitcoin will stifle its development here. We should really be looking at how to help bitcoin businesses develop.

In the meantime the community, regulators and other stakeholders can and should discuss how we can develop new rules (a new type of box) and regulations that might be applied to bitcoin, in the future.

Lets not rush them tho.


I think that would be the ideal scenario to develop.

PirateHatForTea
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December 10, 2013, 10:41:59 AM
 #4

DanielW, this is all true, except that there are people sitting on profits == income from Bitcoin, with no idea how tax applies to it.

The ATO is not in the habit of favouring interpretations such as "there's no specific rules so it's not taxable" - and they have already made a statement that Bitcoin is taxable. So for sure tax will be owing on this income. They just haven't given us any idea of how.

So if a risk-averse bitcoiner (oxymoron?) wishes to make sure they're not gonna get done in the butt if they are ever audited, the only safe way to do that right now is to retain 46% of your profits in case that ends up being the rate payable on it!

If you sell BTC for fiat that ends up in your bank account, it's gonna show up like a big red circle when you get audited.

I completely agree that regulation, like in the case of the airline industry, should be kept to a minimum - but here I think that the more relevant interpretion of regulation would be thing like money transmitting, AML, and other more specific laws. I don' t consider resolving tax ambiguity to be much of an imposition on Bitcoin's potential to innovate, and in fact the clarity would do BTC a great deal of good.

Unlevereged financial instruments acting as a store of value that fluctuate 50% within 10 minutes is perfectly acceptable. I think it should be offered in IRA form to soon to be retirees.
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December 10, 2013, 01:26:12 PM
 #5

Your right. We need clarification regarding taxation, and a minimalist approach towards regulation.

Would treating bitcoins as an asset come with any regulatory baggage for bitcoin businesses or users? (beyond having to pay tax on capital gains)
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December 10, 2013, 02:01:35 PM
 #6

I submitted the required paper work to the ATO for private ruling on the 06/12/13. At some stage I will want to sell some Bitcoins and wire the money to an Australian account. It will be over  AU$10k so it will be flagged/recorded, hence I need to know how it will be viewed by the ATO. Rulings are binding for 12 months, even if other general rulings are made to cover that area after the private ruling is provided.

I want to know what my tax obligations are so I can calculate a sell price that leaves me with an acceptable figure.

I will keep this thread updated as things progress.
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December 10, 2013, 08:25:44 PM
 #7

I thought I would share my experience.

--Background
My accountant is also a Tax Lawyer and the following is based on our conversation.
This is NOT tax advice so use at your own risk.
I use bitcoin as a private investment and as payment method for one of my businesses.

Merchant side:
It's barter. 
I must declare product sales in bitcoin as AUDs for both income and GST purposes.
I must declare any profit/loss while converting from bitcoin to AUDs.  No GST "should" apply on that process.

Private Investment:
Profit/losses subject to CGT.
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December 14, 2013, 05:09:58 AM
 #8

hello,

Forgive me if im out of place, but isnt bitcoins all about NOT PAYING TAX and not getting the governments involved?

As far as i am aware, thats why bitcoins exists.. to stop the madness and take our power back from governments.

mezzie
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December 14, 2013, 09:26:12 AM
 #9

hello,

Forgive me if im out of place, but isnt bitcoins all about NOT PAYING TAX and not getting the governments involved?

As far as i am aware, thats why bitcoins exists.. to stop the madness and take our power back from governments.

mezzie

Its to stop money printing mass inflation and their is not a thing anyone can do to stop Crypto's

but cry and hold fake yes no votes and pretend pretend their government department holds some kind of regulatory power

which none do except the CCCB.




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December 25, 2013, 02:26:58 PM
 #10

Still trying to wrap my head around the legalities of declaring bitcoin income/profits under income tax/capital gains laws, but for now -

If you receive a payment in bitcoins/litecoins, for whatever business transaction, and did not convert it into $, but instead conducted all your business/purchases etc in bitcoin, what requirements are there likely to be for declaring for legal/tax purposes?

For example, if you had a business which exchanged goods for bitcoin, and somehow managed to fund all your expenses (ie supplies, postage etc) in bitcoin,  as well as receiving your income/profit in bitcoin, how would that be viewed?

Would it be viewed as a bartering exchange? If you never actually convert to $, does that rule out needing to declare profit/loss from value exhange?

As far as I gather, the ATO have a reputation for backdating things when they find tax hasn't been paid. Whats the likelihood they're going to hunt everyone down from undeclared bitcoin income when they do make their minds up as to how to classify it?
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December 26, 2013, 12:43:39 PM
 #11

Look if the ATO thinks there is enough money involved they will try.  But they also have limited resources.  The public blockchain is the real wildcard because taint analysis is only going to get easier. 

Given the CGT analysis no tax will apply until converted back to fiat.  If it so happens I become BTC rich I will just become a tax non resident for that year. 
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January 08, 2014, 12:50:13 AM
 #12

I submitted the required paper work to the ATO for private ruling on the 06/12/13. At some stage I will want to sell some Bitcoins and wire the money to an Australian account. It will be over  AU$10k so it will be flagged/recorded, hence I need to know how it will be viewed by the ATO. Rulings are binding for 12 months, even if other general rulings are made to cover that area after the private ruling is provided.

I want to know what my tax obligations are so I can calculate a sell price that leaves me with an acceptable figure.

I will keep this thread updated as things progress.


I'll be following this closely.

Is your request for a private ruling on mined coins or traded coins?
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January 08, 2014, 01:17:00 PM
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Subscribed for further info Smiley
HairyMaclairy
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January 09, 2014, 06:32:54 AM
 #14

I thought I would share my experience.

--Background
My accountant is also a Tax Lawyer and the following is based on our conversation.
This is NOT tax advice so use at your own risk.
I use bitcoin as a private investment and as payment method for one of my businesses.

Merchant side:
It's barter. 
I must declare product sales in bitcoin as AUDs for both income and GST purposes.
I must declare any profit/loss while converting from bitcoin to AUDs.  No GST "should" apply on that process.

Private Investment:
Profit/losses subject to CGT.


Once we get a system like Bitpay you instantly convert the btc to fiat so there should be zero profit or loss so the whole accounting issue just goes away.
David M
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January 12, 2014, 12:04:08 AM
 #15

Once we get a system like Bitpay you instantly convert the btc to fiat so there should be zero profit or loss so the whole accounting issue just goes away.

We already have Bitpay in Australia.
https://bitpay.com/bitcoin-integration-partners

I don't want rotting fiat, that is why I accept the risk of pure Bitcoin payments.  It has worked out well since we started accepting them in 2011.
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January 12, 2014, 01:16:06 AM
 #16

Nice post.

I spoke to my accountant last year about bitcoin. He told me I was a fool.

Now I hold a PHD in crypto   Smiley
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