Warlows Legal recently participated in a loan transaction involving bitcoin where the parties used Blockchain technology to enable bitcoin to be secured and held in escrow for the lender. With Bitcoin now being more commonly used, we look at what bitcoin is, how it is being used and what the ATO is doing about it all.
Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open-source software in 2009. The system is peer-to-peer. This means that users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses bitcoin as its unit of account. The system works without a central repository or single administrator, which has led the U.S. Treasury to categorise the cryptocurrency as a “decentralised virtual currency”. Now, if that doesn’t make any sense to you, don’t fret – it’s pretty complicated stuff. Fortunately for us all, Coindesk has written an excellent explanation of bitcoin here (http://www.coindesk.com/bitcoin-explained-five-year-old/).
So, now that we understand what bitcoin is, let’s consider how it can be used and what the tax consequences are.
According to the ATO, transacting with bitcoins is basically a barter arrangement and is neither money nor a foreign currency. This means that the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes, but is considered to be an asset for capital gains tax (CGT) purposes.
Below are three common uses of bitcoin as identified by the ATO.
1. Receiving bitcoin as payment for goods or services
If you receive bitcoin for goods or services you provide as part of your business, you will need to record the value in Australian dollars as part of your ordinary income. This is the same process as receiving non-cash consideration under a barter transaction. The value in Australian dollars will be the fair market value which can be obtained from a reputable bitcoin exchange, for example.
When receiving bitcoin in return for goods and services, a business may be charged GST on that bitcoin. If the supply of the goods and services was a taxable supply, the business will be able to claim input tax credits on the GST charged on the bitcoin they received as payment.
2. Using bitcoin to pay for goods or services
Where you are carrying on a business and purchase business items (including trading stock) using bitcoin you are entitled to a deduction based on the arm’s length value of the item acquired.
GST is payable on the supply of bitcoin made in the course or furtherance of your enterprise. GST is calculated on the market value of the goods or services. This is ordinarily equal to the fair market value of the bitcoin at the time of the transaction.
3. Paying salary or wages in bitcoins
Where an employee has a valid salary sacrifice arrangement with their employer to receive bitcoins as remuneration instead of Australian dollars, the payment of the bitcoins is a fringe benefit and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act.