Digital currencies and new kinds of financial technology (FinTech) such as Bitcoin and the blockchain are gaining traction. Consequently, the law and tax treatment of cryptocurrencies has evolved and adapted.
As part of the Australian Government’s National Science and Innovation Agenda, the Treasury recently released a discussion paper addressing the GST treatment of digital currency. It focused on the issue of ‘double taxation’ for digital currency under GST legislation as being a serious impediment to the potential for innovation and growth provided by digital currencies.
How Does Australian Law Treat Digital Currency?
Blockchain is a system that uses cryptographical methods to authorise and validate transactions to mitigate duplication, without the need for a centralised authority such as a bank, and drove the emergence of digital currency in 2009 with Bitcoin.
The issue that legal systems have had to grapple with is whether digital currencies can be considered ‘money’, as they cannot be dealt in legal tender and exist only as a representation of a particular value. In Australia, the Australian Tax Office stated in 2014 that Bitcoin is not considered ‘money’ nor a foreign currency but is a form of ‘intangible property’ and therefore subject to GST.
Removing the Double GST Treatment of Digital Currency
Because digital currency is subject to GST, the act of acquiring Bitcoins itself attracts GST. Additionally, when you purchase something with those Bitcoins, you will have to pay GST again resulting in ‘double taxation’.
The discussion paper proposes that the GST ‘double taxation’ treatment be changed or removed by addressing two issues:
- Identifying a list of digital currencies or explicitly defining what is considered ‘digital currency’. This definition will need to be able to encompass all current and future digital currencies. While the definition is intended to be broad and inclusive, it will seek to exclude “synthetic financial instruments” that may be similar to cryptocurrencies but which are beyond the scope of the reforms, such as loyalty points or video game ‘currency’; and
- Considering whether or not to expand the meaning of ‘money’ to include digital currencies, or subject them to ‘input tax’ or GST credits (a system of redeeming GST paid on digital currencies, similar to that of claiming deductions for income tax).
If the GST legislation were to define digital currency as ‘money’, this would be a huge win for Australia as there were fears that the industry would be driven overseas after the ATO’s announcement in 2014 that they did not classify Bitcoin as money.
The Treasury’s discussion paper is just the beginning for tax reform on digital currencies, and it remains uncertain if the Australian Government will adopt the proposed changes and reform the GST treatment of digital currency. All states and territories will need to consent to any changes, which may delay their implementation.
In the meantime, if you are using Bitcoin, purchasing items with digital currencies or accepting them as payment for your products or services, it’s beneficial to understand the current tax laws and how they affect you. If you have questions on issues of buying, selling or using Bitcoins or other digital currencies, get in touch with our finance lawyers on 1300 544 755.