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:
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
