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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7 comments:

  1. I think your headline is misleading, the ATO hasn't given any special treatment to bitcoin over gold, their ruling just assumes that bitcoin is purchased and used as a personal use asset.
    The issue of whether something you acquired was for personal use or as an investment is complex but is not defined in terms of the good acquired. I think the $10,000 reference indicates that the courts and ATO define personal use as small and infrequent things. Acquiring and accumulating large amounts of bitcoin or gold and using all of them in exchange for goods and services would not be sufficient for personal use but trigger a classification as investment.

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  2. I stand by the title. Bitcoin hasn't received special treatment per se, it's just been treated differently under existing provisions. I don't agree with your tweet that it has been treated the same as Gold.

    There is no $10k CGT exemption for Gold (for those who wish to spend it).

    Gold miners don't have to charge GST.

    Gold bullion dealers can sell it without charging GST.

    There are a number of differences and for the individual who wants to transact using Bitcoin the 'personal use asset' classification is a nice little advantage over those who wish to use precious metals in the same way.

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  3. It hasn't been treated differently, all the ATO did is say bitcoin isn't currency under the law and thus the laws that apply to non-currencies applies and those same laws apply to gold, because gold isn't currency either.

    There is absolutely a CGT exemption for personal use assets that applies to gold and any other asset, it is just tricky determining personal use vs investment.

    Yes gold has some extra laws about it re mining and GST, but there is a big difference between mining gold and bitcoins.

    Your last statement I just advise huge caution re using bitcoin. If you look into the case law on personal use and barter I think you'll find it isn't as simple as you make out and again, whatever that case law is it equally applies to gold and bitcoin (and any other good one may want to accumulate for barter purposes).

    For example, see https://www.ato.gov.au/rba/content/?ffi=/misc/rba/content/1011958806551.htm

    "if profit-making is a significant purpose" then not personal use.

    "I find it quite impossible to imagine that she never expected to vary her investments in these commodities in her lifetime" - so if someone sold any of their bitcoins for cash then personal use may be denied, you'd have to only barter every one of them and do so consistently over time and not related to bitcoins price (not just barter when the bitcoin value was high) as that would imply profit making purpose.

    "gold has no immediate use since it does not generate income over the life of the investment (e.g. dividends, rent, royalties or interest). In this regard, the only return that can be derived from an investment in gold is the profit generated upon resale." - That would also apply to bitcoin.
    Just this bit of bush lawyering shows the picture isn't that clear. If someone wants to buy bitcoins and then barter them and think they won't have any income tax on any implied profits as determined by the value of the goods bartered for, I suggest getting tax advice first.

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  4. I see what you are saying. I didn't recall any rulings on Gold as a personal use asset, but interesting a search showed up a result for Gold nuggets:

    http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID2003451/00001

    To be honest I don't see how Bitcoin even falls under the description that the ATO provides for personal use assets "Personal use assets are CGT assets, other than collectables, used or kept mainly for the personal use or enjoyment of you or your associates". I don't see a purpose for Bitcoins other than for their use as a currency.
    The point of my article despite the discrepancies you've alluded to is that I think all monetary assets should be CGT free if they are 'spent' after being saved.

    ReplyDelete
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  6. Everyone is allowed a hobby which can make up to $x000 per year without being tax - bitcoin, gold collecting, scrap metal or model trains etc.

    ReplyDelete
  7. There are some exceptions, but limits are low and collecting Gold coins would be seen under buying a "collectable", not "hobby" in my opinion. https://www.ato.gov.au/General/Capital-gains-tax/CGT-exemptions,-rollovers-and-concessions/Exemptions/

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