Wednesday, August 20, 2014

Bitcoin Gets Capital Gains Tax Break, Why Not Gold?

Late last year ('Glenn Stevens Talks Bitcoin & Competing Currencies') I pointed out that Bitcoin effectively can't be used as a competing currency (likewise for foreign currency or other assets such as Gold) given that it is subject to Capital Gains Tax (CGT) and monitoring the value of Bitcoins as they are acquired and disposed of would not be practical:
"Can you just imagine the administrative nightmare that would result from performing regular transactions in a foreign currency and having to maintain a record of whether you made a gain or loss as a result of fluctuation in the currency markets? It is simply not practical. Bitcoin is not immune from the same requirements." - Bullion Baron
However, earlier today the Australian Tax Office (ATO) released a statement (ATO delivers guidance on Bitcoin) in regards to Bitcoins and their tax treatment. Further information is available on the following page 'Tax treatment of crypto-currencies in Australia – specifically bitcoin' which specifies the following in regards to Bitcoins used in personal transactions:
Using Bitcoin to pay for personal transactions
Generally, there will be no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using Bitcoin). Where you use bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is $10,000 or less.
The 'personal use asset' exemption would normally be reserved for items such as a boat, furniture, electrical goods or other household items which are exempt from CGT if purchased for less than $10,000.

The wording on the ATO website is somewhat ambiguous. Does the limit apply per year or can I buy low (to a maximum of $10,000 worth of Bitcoin) and spend high several times in the same financial year and still avoid CGT?

I think this is a good start and would like to see a similar CGT exemption for Gold (as I suggested last year in 'Let Australians Save in Gold Instead of Debt'). That said, I think the limit imposed is patronizing, why impose a limit at all if the Bitcoins are being purchased with the intention of spending them at a later time? Putting a $10,000 cap on the exemption limits the spending of Bitcoins to novelty use only, it wouldn't be adequate for someone having their income paid in Bitcoins, which was also covered on the site:
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.

In the absence of a valid salary sacrifice agreement, the remuneration is treated as normal salary or wages and the employer will need to meet their pay as you go obligations as usual.
I would like to see any monetary asset (Bitcoin, Gold or otherwise) that is saved for future consumption be exempt of Capital Gains Tax. That would allow us to truly have competing currencies in Australia. Being forced to save in a currency whose value is purposefully devalued (via central bank mandate to target 2-3% annual inflation) is madness, especially when interest earned on those savings is taxed and with the real cash rate already below 0.

Those who have purchased and sold Bitcoin specifically for investment are subject to CGT (or taxed as part of your income if traded in the business of regular profit-making):
Disposing of bitcoin acquired for investment

If you have acquired bitcoin as an investment, but are not carrying on a business of bitcoin investment, you will not be assessed on any profits resulting from the sale or be allowed any deductions for any losses made (however, capital gains tax could apply – although see the comments above about personal transactions). However, if your transactions amount to a profit-making undertaking or plan then the profits on disposal of the bitcoin will be assessable income.

There are no GST consequences where the bitcoin is not supplied or acquired in the course or furtherance of an enterprise you are carrying on.
There is another section for those in the business of mining Bitcoins:
Mining Bitcoin

Where you are in the business of mining bitcoin, any income that you derive from the transfer of the mined bitcoin to a third party would be included in your assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses you make from the mining activity may also be subject to the non-commercial loss provisions.

Your bitcoin is trading stock and you are required to bring to account any bitcoin on hand at the end of each income year.

GST is payable on the supply of bitcoin made in the course or furtherance of your bitcoin mining enterprise. Input tax credits may be available for acquisitions made in carrying on your bitcoin mining enterprise.
The section that deals with ATMs and exchanges is probably the most off putting with an indication that businesses in this area will need to charge Goods and Services Tax (GST), likewise in the supply via mining as mentioned above:
Taxpayers conducting a bitcoin exchange (including bitcoin ATMs)

Where you are carrying on a business of buying and selling bitcoin as an exchange service, the proceeds you derive from the sale of bitcoin are included in assessable income. Any expenses incurred in respect to the exchange service, including the acquisition of bitcoin for sale, are allowed as a deduction. In these circumstances, the bitcoin is trading stock and you are required to bring to account any bitcoin on hand at the end of each income year.

GST is payable on a supply of bitcoin by you in the course or furtherance of your exchange service enterprise. Input tax credits are available for bitcoin acquired if the supply of bitcoin to you is a taxable supply.
This seems to put local Bitcoin exchange and supply businesses at a competitive disadvantage if they have to charge buyers a 10% premium. It would be likely to drive Australian Bitcoin buyers to international sources which don't charge GST.

It is good to see that the ATO has finally addressed Bitcoins for tax purposes, but I don't think they've done a particularly good job here.

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Monday, August 4, 2014

Replica vs Real: 1oz Gold PAMP Bar Comparison

It was bought to my attention that there are fake Gold bars being sold on ebay that replicate popular investment grade 1oz Gold bars. On this occasion they were being advertised as pure bars in the title, but if you read the full description it did state they are only layered in pure Gold. Having some real PAMP 1oz Bars myself I decided to buy one of the replicas to provide a comparison for others (and it arrived late last week). 

I have written about fake Gold and Silver products in the past, you can read my previous posts at these links:

Warning: Fake/Counterfeit Silver & Gold

Counterfeit Silver Lunar Dragons - Don't Get Stung!

Fake/Counterfeit Silver Lunar Coins on eBay, BEWARE! (Perth Mint Replicas)

The ebay auction from which I purchased my fake bar was titled “1 Oz Switzerland Pamp Suisse PURE 24K .999 1oz Gold Bullion Coin Bar Ingot”. The full description was as follows:

Brand new "1oz Switzerland Pamp Suisse bar " This bar is not solid gold.  It is clad/layered in pure fine 100Mills of 24k gold. This is a high quality item beautifully designed and manufactured to very high standard by master craftsmen in a small family owned mint in Australia.

Weight 1 ounce. 30 grams.


Beautifully designed and this Gold Bullion bar will be delivered to you in a free protective airtight capsule.
The title and parts of the description appear intentionally worded to try and deceive unwary buyers into mistaking it for a pure Gold bar from PAMP Suisse, even if it did also mention that it’s not solid and clad/layered. This reminds me of the old ‘console box’ scam where a seller advertises the box of a new console, stating as such, but obviously intending for buyers to bid thinking it’s the whole system. 

The seller of the fake Gold bar also suggested in the description that it was manufactured in Australia, when it’s clearly just a Chinese knockoff, likely to have been purchased from Alibaba (China's biggest online commerce company, which will be floated on the stock market later this year). Further to the misleading wording, the auction also had 3 images, the first two images depicted a real PAMP Suisse 1oz Gold Bar, with the final image showing one of the fake bars the buyer will actually receive.

Below is a photo comparison of the fake bar I received and a real bar, can you tell which is which before enlarging to view the detail and labels? See the top right corner of each image for the answer (click each image to enlarge):

Without the cropping it becomes a lot more obvious which is the fake, see below for a size comparison (click the image to enlarge):

Some obvious design differences include:

- No border around 'PAMP Suisse' logo on real bar
- Missing 'TROY' in text on fake bar (and wording order differs)
- Missing serial number on fake bar
- Corners are more rounded on real bar
- Detail on 'Lady Fortuna' design more intricate on real bar
- Real bar has a stronger yellow hue under the same lighting

Here are some specifications showing the weight and size difference between the fake and real PAMP Suisse bar…

Weight of fake bar (in plastic): 39.80g
Weight of real bar (in plastic): 36.28g

Weight of fake bar (out of plastic): 31.49g
Weight of real bar (per official specifications): 31.10g

Measurements of fake bar: 50 x 28 x 3 (mm)
Measurements of real bar (per official specifications): 41 x 24 x 1.70 (mm)

In this case it was relatively easy to differentiate the fake from the real bar, but keep in mind a copy like this can be purchased in bulk for less than US$1 per piece. There’s nothing to say that better quality fakes (including replication of the official packaging) might be out there. If they can produce this for less than a dollar, then imagine the quality of fake they could produce for $10.

By the way, if you were wondering about the red spots on the real bar, they are a common occurrence even on pure Gold bars and coins (via Lynn Coins):

Gold coins (and even pure gold bars) can sometimes develop brown (rust colored spots) on them. Yes, a gold plated item (when the gold plating wears off) would expose the non-gold metal underneath and that exposed metal could tarnish or rust. However, a brown or reddish spot on gold doesn't mean the item is not real solid gold. Here's why:

Rust spots or brown spots can occur on genuine gold coins when a very faint trace of other metal adheres to the surface of the coin or bar. As the other metal is exposed to oxygen or other materials in the surrounding air (can even be the air that is in the holder) it causes that trace metal to change color.

Often the a faint amount of trace metal or other material will get on the dies prior to the  striking of the coin or bar. When the coin is struck the molecules of the other metal (or impurities) are then fixed into the coin.  They may be so thin or dispersed that they are not obvious to the naked eye. Other times such impurities may come in contact with the coin blank before striking it into a coin. This surface discoloration can occur on gold coins and gold bars.
Be vigilant when buying precious metals, there’s likely to be more unscrupulous sellers than those who try to mislead, but confirm in the detail that they are selling a layered product. Some may even market a listing with description and images of real bars, but then send fake products while hoping the buyer doesn’t realise they are being swindled.

Some of the ways you can protect yourself when buying precious metals:

  • Buy from bullion dealers who source their product through official channels (I can recommend site sponsor Bullion Money for an Australian company and have also had good dealings with Gold Stackers, Bullion List, Perth Bullion, Perth Mint, City Gold Bullion, Ainslie Bullion Company and Bullion Mark, amongst others).
  • If the bullion dealer you are buying from sells buy-backs (second-hand), ensure they have equipment to test what they’re selling to you (e.g. XRF machine).
  • Limit the size of any single order with an individual or dealer to an amount you’d be prepared to lose if the deal goes sour.
  • When buying from ebay, pay with PayPal to ensure you are protected (this doesn’t cost the buyer any extra if purchasing through ebay).
  • If you are unsure about a the legitimacy of a product you’ve purchased, see if there is a local bullion dealer with an XRF machine who can test it for you.
Another way to test whether the product you have is pure Gold is to perform a specific gravity test.

Bullion manufacturers have been innovating in this space, but those replicating their products never seem to be far behind in copying their features. Take every precaution you can when turning your hard earned fiat into hard assets.

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