What will become of Bitcoin?

Bitcoin GST

DLA Piper, GST partner Matthew Cridland said any sale of bitcoins to convert them into currency would not be exempt from attracting the sales tax charge. Retailers that accepted bitcoin as a form of exchange would risk paying GST twice: First on the sale of good and services and second when converting them back into cash.

“Strictly and legally speaking there are two transactions and that’s what gives rise to the two lots of GST, but I think that for most retailers economically and commercially they would view it as one transaction, hence they may view that as a double GST liability,” says Credlin.

The same double-hit would arise if a retailer were to use bitcoins making purchases from wholesalers, explained Credlin.

Bitcoins - A brief history

Bitcoins are a form of distributed crypto-currency generated by committing computing power to their creation and as a reward for participating in a peer-to-peer ledger of transactions recording their exchange. They’re not tied to any single issuing authority (i.e. the Federal Reserve) and the number of bitcoins that can validly be created using cryptographic is 21 million.

Bitcoins are currently worth around $600 to $700 but can be broken down into smaller units. They have become popular because they bypass transaction fees levied by financial institutions.

Computer giant Dell made headlines last month when it announced it would start accepting payments from consumers in bitcoin. While in the American state of Colorado a vending machine offers bitcoin as one of its payment options.

Regulating Bitcoin

The ATO released its advice on August 20, 2014 after a near three-month delay while the agency sought extra external legal advice to deal with the complex issue.

“I think the ATO’s guidance and the views that have come out today provides companies that are interested in bitcoins as a platform for lobbying treasury and the government … for legislative change and perhaps to have something implemented to clear the way for crypto-currencies,” says Credlin.

Mr Credlin said that it wasn’t the case that the ATO was applying a double-standard in subjecting bitcoin purchases to GST while refusing it status as money. He said it was trying to avoid being flooded with ambit claims that other alternative forms of exchange should qualify as money.

The ATO advised that hobbyist bitcoin traders would largely escape GST liability but that businesses that use the crypto-currency to pay wages would be subject to the Fringe Benefits Tax Act.

Similarly, there may be capital gains tax consequences for businesses that procure and trade bitcoins for investment purposes.