While the use of crypto-currencies such as Bitcoin have increased in popularity in Australia there has very little legal clarification provided by regulators or legislators in relation to its legal status.
Bitcoins are referred to in a number of ways including a peer to peer payment system, a digital currency and a global currency. The challenge presented by Bitcoin is its versatility. It can be mined, stored, used as an investment, traded, used to purchase goods and services, form part of a salary package, used as part of a derivatives transaction or exchanged for physical currency.
The first official regulatory response has been issued today by the Australian Taxation Office (ATO) in the form of public guidance on the treatment for transactions associated with crypto-currencies, specifically Bitcoin.
The specific draft Taxation Determinations issued today are as follows:
Bitcoin is not a 'foreign currency'
Bitcoin is a 'CGT asset'
Bitcoin, when held for the purpose of sale or exchange in the ordinary course of a business, is trading stock
The provision of Bitcoin by an employer to an employee in respect of their employment may be a property fringe benefit
A transfer of bitcoin is a 'supply' for GST purposes. The exclusion from the definition of supply for supplies of money does not apply to bitcoin because bitcoin is not 'money' for the purposes of the GST Act. The supply of bitcoin is not a 'financial supply' under section 40-5. Further, it is not an input taxed supply under paragraph 9-30(2)(b). A supply of bitcoin is a taxable supply under section 9-5 if the other requirements in section 9-5 are met and the supply of bitcoin is not GST-free under Division 38 (for example, as a supply to a non-resident for use outside of Australia). A supply of bitcoin in exchange for goods or services will be treated as a barter transaction
Bitcoin as an asset
Satoshi Nakamo in his original paper: Bitcoin: Peer-to-Peer Electronic Cash System defined an electronic coin as 'a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership".
In issuing the series of draft Taxation Determinations today the ATO has determined that this chain of digital signatures is neither money nor a foreign currency but an asset and that transactions using Bitcoin are similar to barter transactions.
The ATO did not use Nakamo's definition but referred to the Oxford Dictionary of English which defines Bitcoin as 'a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank'.
In coming to this conclusion the ATO considered the case law with respect to 'currency' within the meaning of paragraph 51(xii) of the Constitution and judgements where the courts had held that currency consists of notes or coins of denominations expressed as units of account of a country and issued under the laws of that country for use as a medium of exchange of wealth.
The treatment of Bitcoin by the ATO as property is in keeping with the US Internal Revenue Service Virtual Currency Guidance Ruling in March 2014 and with the position taken by Canada Revenue in April 2013 which applied barter transaction tax rules apply when Bitcoins are used to purchase goods or services.
Transactions conducted in Bitcoin will be treated in Australia for tax purposes as similar to barter transactions where non cash consideration is received. The value in Australian dollars will be the fair market value which can be obtained from a reputable bitcoin exchange for example.
The ATO has indicated that for tax purposes the following records will be required in relation to bitcoin
the date of the transaction(s);
the amount in Australian dollars (which can be taken from a reputable online exchange);
what the transaction was for; and
who the other party was ( this could be their Bitcoin address).
Financial Services Regulation
For the purposes of financial services regulation in Australia the differing views on the status of Bitcoin is significant. While some parts of the industry refer to Bitcoin as a digital currency, the opposing view and one which appears to be supported by the ATO is that it is a commodity.
Some services associated with bitcoins may be financial products but the specific model used for each business will impact on whether or not financial services are being provided and whether Chapter 7 of the Corporations Act, 2001 (Cth) will apply. For example, a facility by which people can use Bitcoin to pay for goods and services may be a non-cash payment system.
The ATO has determined that Bitcoin is neither Australian or foreign currency. For the purposes of the Corporations Act 2001 (Cth), a person makes non cash payments (NCP) if they make payments or cause payments to be made otherwise that by the physical delivery of Australian or foreign currency in the form of notes and/or coins.
A facility that makes payments or causes payments to be made otherwise than by the physical delivery of Australian or foreign notes or coins is a financial product. An Australian Financial Services (AFS ) Licence is required to provide financial services ( such as advice and arranging) in relation to NCP facilities.
A non cash payment facility is likely to exist where there is an arrangement that enables the holder of the facility to transfer value by making a NCP to a person (the recipient of the transferred value); and the value comprises a right against another person (the operator of the facility), such as a right that the operator pay the recipient.
ASIC give the following examples:
an instruction by a client to make a non-cash payment to a particular payee is a ‘use’ of the NCP facility by the client;
for a stored value facility, the NCP facility is the arrangement (which may include a physical token or card) that gives a person the ability to make non-cash payments to various payees from time to time, while presentation of the card to make a purchase is a ‘use’ of that facility; and
for direct debits, the NCP facility is the arrangement between the client and a financial institution that gives the client the ability to make direct debit payments to various persons (payees) from time to time, while an order by the client to make a direct debit payment to a payee is a ‘use’ of the facility.
Specific examples given by ASIC of NCP Facilities include cheque accounts, travellers cheques, stored value cards, electronic cash, direct debit services, payroll cards, gift vouchers and cards, funds transfer services, electronic bill payment services and some loyalty schemes.
ASIC is of the view that electronic payment facilities using electronic or online facilities can be facilities through which NCP can be made. It has included in its examples of such facilities:
bill payment facility – facilitates the payment of bills from a customer to a merchant;
rent payment facility – facilitates the payment of rent from a rent payer to the real estate agent or the landlord;
payroll services – allows employers to make salary and related payment to employees. It may also allow the employee to direct some payments to third parties (i.e. salary sacrifice).
A facility to make payments or cause payments to be made in Bitcoins may be a NCP facility if it facilitates the payment of goods and services.
Bitcoin exchange transactions including Bitcoin ATMS
Making a market by regularly stating the price at which a person will buy or sell a financial product requires an AFS licence unless the person making the market is the issuer of the financial product.
If Bitcoin is used to transfer value as a form of payment, and so a NCP, it will be a financial product and conducting a Bitcoin exchange would be making a market which is a regulated activity.
Whether Bitcoin exchanges are treated as a market making activity remains to be seen as ASIC has not issued any guidance on the use of Bitcoins despite the number of exchanges operating and Bitcoins being marketed as investments or as an alternate form of payment to cash.
Pressure is building on regulators in Australia to provide more formal guidance on Bitcoin and with the release of the ATO Guidance and with some businesses applying to ASIC for AFS licences specifically in relation to Bitcoin it is likely that the ATO Guidance will be the first of several guidance notes being released. The Murray Interim Financial System Inquiry has raised the development of virtual or crypto-currencies such as Bitcoin and cited the need in dealing with NCP for regulation to not favour one form of non-cash payment, such as credit cards, over another, such as direct debit.
Many of the questions in relation to the regulation of Bitcoin and financial services remain unanswered despite the emergence of Bitcoin derivatives, Bitcoin ATMs and the development of Bitcoin prepaid cards.
The concept of a 'barter transaction' does not reconcile easily with the availability of Bitcoin ATMs, the acceptance of Bitcoin to pay rent in the housing market, the acceptance of Bitcoin for online gambling or the payment of holidays , hotels, flowers and a range of other traditional merchant services.
The ATO's Guidance and the ongoing Murray Financial Services Inquiry provides an opportunity for interested business to now start lobbying the Government for amendments to Australia's tax and financial services laws to better deal with bitcoins and other crypto-currencies.