Earlier today the ATO released its long awaited public guidance on the Australian tax and GST treatment of bitcoin and other crypto-currencies. This guidance was originally scheduled to be released on 30 June 2014. It was delayed while the ATO considered further submissions and sought advice from legal counsel. The issues raised in the ATO's guidance will be relevant to all businesses considering trading or making payments with bitcoins in Australia, including businesses considering accepting bitcoins as payment for goods or services. In this Tax Update we have summarised the ATO's views and outlined the potential risks and options for impacted businesses.
Note that in this Tax Update we have used the capitalised term "Bitcoin" to refer to the Bitcoin payment system and the non-capitalised term "bitcoins" to refer to the crypto-currency.
Summary of ATO's view
For GST registered businesses that supply bitcoins in Australia, the ATO's view is that:
bitcoins are neither money nor a foreign currency
making a payment with bitcoins is akin to a barter transaction (potentially triggering a GST liability on the bitcoin payment)
the sale of bitcoins (for example, as part of an exchange transaction) is a taxable supply and subject to GST
input tax credits (GST credits) may be available for the acquisition of bitcoins through a taxable supply
In respect of other taxes, the ATO is also of the view that:
bitcoins are an asset for CGT purposes
the disposal of bitcoins by a business may give rise to CGT consequences
taxpayers receiving bitcoins for the provision of goods or services will need to recognise the fair market value of the bitcoins as assessable income
taxpayers purchasing business items using bitcoins can recognise a deduction equal to the arm's length value of the item acquired
paying a staff member with bitcoins may give rise to FBT considerations (if there is a valid salary sacrifice agreement) or PAYG obligations (in the absence of a valid salary sacrifice agreement)
taxpayers that engage in bitcoin "mining" activities will need to consider whether they are carrying on a business, in which case the mined bitcoins may be trading stock (with deductions available for associated expenses)
taxpayers that do not carry on a business and instead hold bitcoins as an investment will not be assessed on profits or entitled to deductions (but may have a CGT liability, subject to the concession for personal use assets valued at AU$10,000 or less)
The risk of "double GST"
In March we published a Tax Update on the GST treatment of bitcoin payments in which we highlighted the potential risk that the ATO may not accept that bitcoins are money or foreign currency for GST purposes. A copy of that earlier Tax Update is available here.
One of the potential implications that we highlighted related to potential "double GST" for businesses that accept bitcoin payments in exchange for goods or services. We consider the ATO's guidance confirms that potential risk.
To illustrate, assume that a retailer sells an appliance to a customer for AU$110 (including AU$10 of GST). The retailer offers the customer the option to pay in either Australian currency or the bitcoin equivalent. The customer takes the bitcoin option. The retailer continues to have an AU$10 GST liability on the sale of the appliance.
Immediately following the sale, the retailer decides to sell the bitcoins to an exchange for AU$110. On the ATO's view, this sale will involve the supply of an asset and trigger a second GST liability of AU$10.
In this example the retailer will be liable for GST of AU$20 in total. While there are strictly two separate transactions (i.e. the sale of the appliance and the sale of the bitcoins), each giving rise to a GST liability, the retailer would likely take the view that economically there is only one transaction. The second GST liability would not arise if the retailer had been paid in Australian currency (or a foreign currency) at the outset.
GST payments and barter transactions
Our earlier Tax Update also highlighted the risk that GST registered businesses which make payments with bitcoins may be involved in a barter transaction, potentially triggering a GST liability on the bitcoin payment. Again, the ATO's guidance confirms this risk.
Continuing the above example, assume that the appliance retailer who accepted the bitcoins decided to use the bitcoins to purchase new stock (instead of selling the bitcoins to an exchange). On the ATO's view, the payment of the bitcoins to the wholesaler would be a taxable supply, with the consideration being the goods received in exchange. This would trigger a AU$10 GST liability for the retailer on the bitcoins payment.
In the context of a business-to-business transaction the GST liability on the supply of the bitcoins, and the input tax credit on the associated acquisition, may net out to "nil" in the same GST return. The parties would need to ensure that they have exchanged tax invoices and recorded the barter transaction correctly for compliance purposes.
For example, the retailer's acquisition of the new stock in exchange for the bitcoins should give rise to a AU$10 input tax credit entitlement. In the retailer's GST return the GST liability on the supply of the bitcoins, and input tax credit for the purchase of the new stock, should net out to nil.
The above example may indicate that the GST impact of business-to-business bitcoins payments is neutral for the party making the payment. However, we note that in the above example the retailer would have been entitled to a AU$10 input tax credit for the new stock if Australian currency had been used instead. That credit could have been used to offset other GST liabilities of the retailer, instead of being used to offset the GST liability arising on the bitcoins payment.
Record keeping and valuation issues
The ATO's guidance confirms that the ATO will expect taxpayers to retain at least basic details concerning bitcoin transactions. This will be particularly relevant for suppliers who accept bitcoins as consideration for a taxable supply that is subject to GST. Generally speaking, suppliers are required to issue tax invoices showing any GST payable in Australian dollars. The ATO's guidance indicates that the market value of the bitcoins received could be determined by reference to the exchange rates quoted on a reputable Bitcoin exchange.
GST and cross-border bitcoin transactions
It should be noted that the ATO's view on bitcoin supplies (including exchange transactions and payments) relate to supplies made in Australia. There are GST exemptions that can apply to cross-border supplies, potentially including supplies of bitcoins to non-residents outside of Australia.
Are the ATO's views correct?
The new guidance sets out the ATO's view in high level terms and is available on the ATO's website here . The ATO has also released related draft public rulings which set out the ATO's views in more detail. Taxpayers will be able to provide submissions to the ATO during the consultation period for the draft rulings.
Of course, the ATO's view is not law and is open to be challenged by taxpayers who receive an adverse assessment or unfavourable private ruling. This may involve objections and could potentially involve litigation proceedings.
What should businesses do in light of the ATO's new guidance?
Businesses considering accepting bitcoins as payment for goods and services should first carefully consider the tax and GST implications, having regard to the ATO's views. Notwithstanding the ATO's view, it may be that the tax issues can be managed in such a way that it continues to be commercially advantageous to accept bitcoins.
For businesses that have previously engaged in bitcoin sales or payments, we suggest the following:
if possible, identify those transactions that have occurred within Australia and those which have occurred on a cross-border basis
for transactions that have occurred in Australia, consider whether there is any basis on which GST should not apply
for all transactions, consider whether a tax or CGT liability may have arisen in respect of any profits or gains
consider whether any voluntary disclosures may need to be made to the ATO (or private rulings sought from the ATO) for past transactions
if an adverse assessment or unfavourable ruling is received, consider whether an objection or other dispute resolution option is available
consider how bitcoin sales and payments will be structured in future transactions
The ATO's guidance also provides an opportunity for interested business to now start lobbying the Government for amendments to Australia's tax laws to better deal with bitcoins and other crypto-currencies.