Bitcoins and Tax in Australia

Earlier this month the Australian government introduced a bill that aims to solve the issue of double taxation on cryptocurrencies. Essentially, Australians are charged GST when purchasing digital currency. This is unlike any other exchange in the world, in that we aren’t just charged GST when we buy USD, JPY or Euros. This would seem to be an Australian endorsement for financial technologies that operate within digital currencies, and a movement towards the important recognition that digital currencies deserve.

Though, another interesting development from this is the topic of tax. Potts, Berg and Davidson argue in their article that digital currencies fall into a untaxable black hole at this stage but they should be rightly taxed. In this essence, cryptocurrencies exist as a decentralised ‘trustless’ technology and avoid the existence of central banking systems to manage risk. This allows the currency to be an efficient mechanism for finance, and is probably one of the best use-cases for the currency.

Though, it’s interesting to consider what exactly bitcoins are considered as. In one sense, they are a virtual currency – a digital representation of value that is a medium of exchange. Australia and the US both agree that bitcoin is an asset for capital gains tax purposes. But as a currency, it may fall into the difficult and complex legal rabbit hole of taxing forex investments.

Tax management in these digital currencies may have to consider timing and character mismatches. Timing mismatches affect the time of recognition of assessable income and deductions for a given income year. Whereas character mismatches occur when there is no ability to offset realised capital deductions against gains. It becomes confusing when considering your existence as a trader or an investor in these goods. Ken Woo goes into it in more depth in this article in a generalised view on foreign exchange.

For a bitcoin investor, they may face similar types of unrealised losses and gains to a foreign exchange investor. Though, this would likely occur more within CFDs which are becoming far more popular with the rise of trading platforms like Plus500 – thus it is not truly connected to the bitcoin.

The answer is unclear, there is obviously a need to tax bitcoin investments like any other investment but it does not seem as if current taxation functions through CGT do not do this already. It would be interesting to hear your thoughts on the matter.