Bitcoin is ubiquitous. It is impossible to open a social media stream or news source without encountering yet another mention of the topic. Many Australians have invested, hoping for a good return.
But they may not have considered the tax consequences of their investments. So some might be in for an unexpected surprise.
The tax implications of Bitcoin ownership and other cryptocurrencies such as Ethereum largely turns on how seriously an investor pursues and manages their purchase.
Given the enormous computing power and electric power needed to create Bitcoin from scratch, few Australians are actively mining Bitcoins.
Mining involves creating digital information that yields the unique data “tokens” known as Bitcoins. It involves using specialised software to add new groups of transactions (known as blocks) to the shared transaction record (known as the blockchain.
Trading in Bitcoins
People who create Bitcoins are considered to be running a business and face the same tax consequences as any other active business, paying ordinary income tax on their profits.
However, most Australian Bitcoin investors are using online exchanges to buy and sell already created Bitcoins.
For them, the tax consequences will depend in the first instance on the frequency with which they buy or sell their Bitcoins and the level of study and ongoing monitoring and management they assign to the investment.
A passive Bitcoin investor who simply buys some coins and largely ignores it until an opportune time to sell comes up will be treated purely as an investor by the Australian Taxation Office.
For these people, the coins are characterised as passive investment assets similar to ownership of shares, gold or land. These Bitcoin investors will be subject to the capital gains rules in the income tax law.
If they realise a gain on the sale of Bitcoin and the sale takes place within a year of the purchase, the gain will be fully included in the investor’s taxable income for the year the sale took place.
If the sale takes place more than a year after purchase, the investor will qualify for a capital gains tax discount that makes half the gain exempt from tax, with only half included in their assessable income subject to taxation.
But if the investor has a loss on the sale of Bitcoin, it can be recognised for tax purposes. But it will be quarantined against capital gains realised by the investor.
In other words, it can only be used to reduce the amount of capital gains realised by the investor on the sale of other assets.
Assumptions challenged
While it is generally thought the capital gains treatment of Bitcoin sales has been settled for some time, a recent criminal case challenges some commonly accepted assumptions.
The case was brought against a police officer charged with stealing Bitcoin recorded on a hardware wallet seized in a drug raid.
The magistrate suggested Bitcoin was an asset (a view consistent with that of the tax office) but went on to suggest it was property similar to money.
This led at least one tax lawyer to suggest there would be no tax consequences from selling Bitcoin for cash, as this would be akin to exchanging money for other money.
It is, however, very unlikely a tax court would use a comment from the criminal case to unwind what has been settled tax law.
Active investors
If investors plays a more active role by frequently buying and selling Bitcoin or by actively researching and monitoring factors affecting its price, the tax office may consider they have shifted from being a passive investor to an active trader.
A number of tax consequences follow.
At one time, designation as a Bitcoin trader might have triggered a GST liability. If an investment trader has sales exceeding A$75,000 per year, they are considered an enterprise that must register as a GST business and pay GST on sales of goods or services.
This included sales of Bitcoins, which were regarded as intangible goods by the tax office similar to music, films or other types of personal consumption.
The tax office’s view
However, following a very intense and ultimately successful lobbying campaign by digital commerce groups, the tax office revised its view and now considers Bitcoin to be a form of money for GST purposes.
That means a sale of Bitcoin is treated as an exchange of money similar to changing Australian dollars for UK pounds or a $10 bill for five $2 coins.
The office now recognises no sale of goods or services when there is a transfer of Bitcoin, leaving the transaction outside the goods and services tax system.
The tax office’s view is the characterisation of Bitcoin as equivalent to money for goods and services tax purposes has no bearing on its character for income tax purposes. Instead, it is treated the same as any other trading stock or business asset if the seller is considered a trader.
This has two implications. First, if the seller realises a gain on the sale of Bitcoin, the full amount of the gain is included in the person’s taxable income, regardless of whether it is sold more or less than one year after acquisition.
Secondly, and very importantly for some, if an investor has a loss on the sale of Bitcoin – for every winner there is a loser in the investment world – and can convince the tax office they are an active trader, they can recognise the full loss. This means they can use the loss to offset other taxable income including wage and salary or business or professional income.
Those who have taken the plunge into a Bitcoin investment or those considering the possibility should first consider carefully the tax consequences.
