Co-Authored by Emma Petroulas & Aaron Wallace, Co-Founders of Nudge Accounting
With Bitcoin use increasing in Australia, there has been little guidance to date from the ATO and other regulatory authorities about the accounting and tax treatment of this payment method. So we have put together a list of some of the key accounting and tax questions you may have when using Bitcoin.
1. How may the ATO view Bitcoin?
Bitcoin is a crypto currency that operates on a decentralised network globally and has experienced rapid growth in its use. It is supported by a community of users, as opposed to a central government and does not have a corresponding physical presence.
When making a purchase using Bitcoin, the consumer is handing over a portion of their Bitcoin code to the vendor who in return, is providing a good or service.
While there has been public analysis that the ATO is considering whether Bitcoin should be classified as a currency or a commodity, the definition of both words from the Oxford Dictionary brings greater clarity to the situation:
Currency: a system of money in general use in a particular country
Commodity: a raw material or primary agricultural product that can be bought and sold, such as copper or coffee
In review of these definitions, it is likely that the ATO may view Bitcoin as a currency, much like any foreign currency. As the trading price of Bitcoin can be tracked on exchanges (while the trading partners remain anonymous), there is a level of transparency from an exchange that can be used to support its currency status.
Outcome: Bitcoin will likely be viewed as a foreign currency by the ATO when they issue guidance on this topic
2. If I make a sale from my business and the customer pays using Bitcoin, do I need to record the GST on the sale?
a) When you make a sale to a customer, you should be issuing a valid tax invoice that includes GST if you are registered for GST. You will be required to remit this amount to the ATO the next time you lodge a Business Activity Statement.
b) If you are not registered for GST, you cannot include a GST component on the tax invoice and you are not required to remit any portion of this sale as GST to the ATO.
Outcome: Yes, you are required to record the GST on this sale if you are registered for GST.
3. If I buy something for my business using Bitcoin, can I claim GST on the purchase?
a) When making a purchase for your business and the supplier provides you with a valid tax invoice that includes their ABN and a GST amount, you are entitled to claim the GST back if you are registered for GST. This is irrespective of the currency you purchase the goods in.
b) If the supplier provides you with a valid tax invoice that includes their ABN and there is no GST on the invoice, you are not entitled to claim any GST, even if you are registered for GST.
Outcome: Yes, you should be able to claim GST on eligible business purchases if you receive a valid tax invoice that includes GST and you are entitled to claim the GST.
4. Do I need to record sales made with Bitcoin in my income tax return?
The rules of ordinary income apply when you make a sale and payment for that sale is received via Bitcoin. When you generate a tax invoice upon sale, you will be deemed to have made a sale at that point if your accounting system is on an accruals basis. The key point is that the recognition of the income is separate to how it is paid. So if you are being paid by Bitcoin, or by cash, you will still need to record any sale as ordinary income.
If you are recording income on a cash basis, you will need to record your Bitcoin payment as a sale in your income tax return. This is the case even though Bitcoin is an anonymous payment method.
Outcome: Yes, you will need to include all ordinary income from sales made using Bitcoin in your income tax return.
5. Can I claim a tax deduction for business purchase made using Bitcoin?
The rules of general and specific deductions apply when you make a purchase for your business and that purchase is made via Bitcoin. When you receive an invoice when making a purchase, you will be deemed to have incurred a business expense at this point if your accounting system is on an accruals basis. This is irrespective of whether you are paying via Bitcoin or other means.
If you are recording deductions on a cash basis, you will need to both record and support your Bitcoin payment as a means of identifying that the business deduction was actually incurred.
Outcome: Yes, you can claim eligible business purchases made using Bitcoin as a tax deduction. Given the difficulties the ATO faces in tracking Bitcoin payments, make sure you keep records supporting your payment for this business expense.
6. The tax treatment of Bitcoin as a foreign currency?
If the ATO view Bitcoin as a foreign currency, there are different taxation implications that may impact you.
a) Are you holding Bitcoins to make a purchase for your business?
If you’re holding Bitcoins in an account to receive sales and make purchases for your business, there are many rules and exemptions that can apply to your business. One of the most basic factors with foreign currency is that there are often movements in the value of the currency between when a sale or purchase is made and payment is made or received. You will need to ensure that any gains or losses from the date that you recorded the transaction and when it has been paid are recorded as a foreign currency movement in your income tax return.
b) Are you holding Bitcoins as an investment?
If you make an investment in Bitcoins, you are hoping that the value of your holding will grow. Should you decide to sell your Bitcoins, it may be treated in different ways depending on your circumstances:
- If you are a frequent trader in Bitcoin, the ATO may view that you are in the business of trading Bitcoins and all gains and losses associated with this trading will be recognised as business income.
- If you are an infrequent trader in Bitcoin, the ATO may view that your trading is on the capital account and normal CGT rules apply. This means that if you hold the asset for greater than 12 months, you may be able to access the CGT discount on any gains made on this asset.
Outcome: There are different tax treatments along with rules and exemptions that can apply to your business when dealing with foreign currencies including Bitcoin. It is best to chat to your professional adviser to ensure that you are receiving appropriate advice for your specific needs.
This article is general in nature and is not intended to replace in any way professional accounting and legal advice.