Did bitcoin just become a personal use asset in Australia?

Friday 22 August 2014

The Australian Tax Office (ATO) recently released their guidelines on how they intend to treat bitcoin in Australia. The paper also provides an overview for other crypto-currencies. Financial expert, Lloyd Chin, looks at whether bitcoin just become a personal use asset in Australia.

bitcoinsIn short, my understanding is that the ATO intends to treat bitcoin as follows:

1. Bitcoin is a good and not money because the ATO couldn’t fit bitcoin as money under the definition of “money” per the GST legislation.

2. When a business who is GST registered sells bitcoin, it must charge GST on those bitcoins. Therefore, people buying bitcoins from an exchange must pay GST.

3. True marketplaces such as btcmarkets.net should not be affected because they facilitate the exchange of bitcoins between individuals via a market mechanism; Btcmarkets.net is not selling bitcoins themselves.

4. Bitcoins can be treated as a personal use asset, which means bitcoins will be exempt from capital gains tax if the cost of those bitcoins is less than $10,000 and the bitcoins are consumed as a personal use asset. And as you shall see this can be a very good thing.

I’m not going to cover the complexities of the GST legislation as it relates to businesses because it’s a little technical – and dry. The upshot is that Australian businesses will find it difficult to sell bitcoins to the public but they should have no issues with receiving bitcoins themselves for goods and services. However, once a business receives bitcoins from the public, it might find it difficult to convert those bitcoins back to Australian dollars. Businesses may have to use overseas payment processors or sell bitcoins on overseas exchanges.

Now, let’s move on to the more interesting aspects of the tax ruling. The ATO now allows bitcoin to be treated as a “personal use asset”. See http://law.ato.gov.au/atolaw/view.htm?DocID=DXT/TD2014D12/NAT/ATO/00001

The specific paragraphs state – see the underlined sections:

CGT consequences of disposing of Bitcoin
15. The disposal of Bitcoin to a third party gives rise to CGT event A1 under subsection 104-10(1) of the ITAA 1997. A taxpayer will make a capital gain from CGT event A1 if the capital proceeds from the disposal of the bitcoin are more than the bitcoin's cost base. The capital proceeds from the disposal of the bitcoin are, in accordance with subsection 116-20(1) of the ITAA 1997, the money or the market value of any other property received (or entitled to be received) by the taxpayer in respect of the disposal. The money paid or the market value of any other property the taxpayer gave in respect of acquiring the bitcoin will be included in the cost base of the bitcoin in accordance with subsection 110-25(2) of the ITAA 1997.
16. However, section 118-20 of the ITAA 1997 reduces any capital gain made by a taxpayer by an amount that is included in the taxpayer's assessable income under another provision of the tax law, for example, ordinary income under section 6-5 of the ITAA 1997.
17. Under subsection 118-10(3) of the ITAA 1997, a capital gain made from a personal use asset (a CGT asset used or kept mainly for personal use or enjoyment) 13 is disregarded if the first element of the cost base is $10,000 or less. 14 In addition, any capital loss made from a personal use asset is disregarded under subsection 108-20(1) of the ITAA 1997.
18. This Draft Tax Determination is not intended to define the circumstances in which Bitcoin would be a personal use asset. Bitcoin is not kept or used for personal enjoyment. Bitcoin that is kept or used mainly for the purpose of profit-making or investment, or to facilitate purchases or sales in the course of carrying on business is not used or kept mainly for personal use. Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use. Other categories of use conceivably could exist; taxpayers in these cases should seek private rulings.

It appears that if the cost of acquisition of your bitcoins is less than $10,000, any subsequent capital gains when spending those bitcoins is disregarded.

There is an important caveat. If you purchase bitcoins for trading or investment reasons, the personal exemption rules may not apply to you. However, if years down the track you “consume” your bitcoins by using it to purchase goods and services, then arguably those purchases appear to be free of capital gains tax. Let’s look into the concept of a personal use asset.

Bitcoin as a personal use asset

Things that fall into the personal use asset category include things like wine. If you purchase a $5,000 bottle of wine and that wine increases in value to $50,000 over 10 years, when you drink that wine you will not be liable to pay capital gains tax on the capital appreciation of the wine. This is an example on how the personal use asset exemption works. As long as the cost of the item is less than $10,000, you do not have to pay capital gains tax on the subsequent price appreciation.

Bitcoin is being treated in a similar manner: $10,000 worth of bitcoins purchased at say $10 each a few years ago is now worth more than $500,000 (assuming a rate of $500 per bitcoin). Just like the bottle of wine, you will not be liable to pay capital gains tax when you consume $500,000 worth of bitcoins today, which is frankly amazing.

In effect, bitcoins are capital gains tax free on the proviso that you originally purchased the bitcoins for personal use reasons and not as part of a trading business or for investment reasons. Basically, we are being told to buy and spend later. Please confirm your individual circumstance with the ATO by obtaining a private ruling before proceeding.

Bitcoin in retirement

The implications of the ATO tax ruling are rather positive for bitcoin in Australia. Australians did not have a reason to purchase bitcoins before but now they do and here’s why: you can effectively purchase $10,000 worth of bitcoins and if the value of those bitcoins increase and turns into a sizeable fortune, you will pay zero capital gains tax when you spend those bitcoins in personal consumption.

Of course, bitcoin is a highly volatile digital currency and it will not be appropriate for everyone to implement this strategy. Please consult a qualified financial adviser before buying $10,000 of bitcoins.

Logically, the reasons for buying bitcoins is now extremely persuasive: If $10,000 will not change your life today, even if you lose it all, then what have you got to lose? Bitcoin has now become some kind of “long shot - spend in retirement” currency, the equivalent of buying lotto with arguably higher odds of winning.

All-time bitcoin chart to date: 

Bitcoin all time price chart

Chart: http://www.cryptocoincharts.info/v2/pair/btc/usd/bitstamp/alltime:
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Whilst the tax fundamentals for a buy and hold strategy are in place, one should not forget that bitcoin is a highly volatile asset, digital currencies are a fast evolving technology, tax rulings can change and tax laws might be rewritten. However, if Australia fails to keep pace with tax rulings overseas, in Hong Kong, Singapore, the UK and Germany, we risk being left behind. It is perhaps more likely that the Australian government can be convinced that bitcoin should be treated as money in the near future, which bodes well for a favourable capital gains tax treatment of bitcoin going forward.


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