The tax office declaring Bitcoin is not a currency should come as no surprise

Bitcoin and Dollars.

In a move that has dismayed the Australian Bitcoin community, the Australian Tax Office (ATO) has provided tax guidance declaring that the crypto-currency Bitcoin is not actually a currency at all, but an asset like shares. This has a number of consequences for both consumers and businesses wanting to buy, sell and exchange Bitcoins in Australia, which has led some Bitcoin commentators to warn that the rules will drive Bitcoin business offshore and generally stifle the growth of its use in Australia.

ATO decides Bitcoin is not a foreign currency

The ATO arrived at their decision through a considered, but straightforward process. They asked the question whether Bitcoin could legally be considered to be a foreign currency according to Australian taxation law. The argument that the ATO kept coming back to in this deliberation was that a currency is something that is essentially recognised and legally controlled by a State (country). This was the means by which the Currency Act (1965) defined Australian currency and further, that foreign currency was defined as any currency that was not Australian.

Others would argue that the question of whether Bitcoin is a currency rests on whether it meets the functions of money which are that it is [1] a medium of exchange, [2] a unit of account and [3] a store of value.

The ATO decided that even though Bitcoin seemed to satisfy some of these criteria, its use was not widespread enough nor was it a generally accepted medium of exchange. And besides, it had already decided that it didn’t meet the criterion of foreign currency anyway, making the discussion moot.

Others agree Bitcoin is not money

The fact that Bitcoin fails to meet the basic functional characteristics of money is something finance experts such as Professor Yermack of New York University have also argued. Bitcoin is not a generally accepted medium of exchange because its use is still very low. It also can’t really be considered to be a unit of account as in a measure of value in its own right because when people consider the value of Bitcoin, they immediately see this in terms of dollars or some other currency. Businesses which accept Bitcoin typically don’t hold onto the Bitcoin itself. As soon as they receive a payment in Bitcoin, they exchange it for another currency.

In a nutshell, for Bitcoin to really qualify as money, many more people and businesses would need to be using it. The Catch-22 here is that many more people might use it if it was first declared to be accepted as a real currency. For this to happen, Governments would have to change laws, or some nation state would need to declare Bitcoin to be its national currency.

The ATO’s decision that Bitcoin is not currency is also in accord with the US Internal Revenue Service who came to the same conclusion.

Charging GST for Bitcoin

Once the ATO had decided that Bitcoin was not a foreign currency, it then really had to decide that it was an asset and so businesses selling Bitcoin would need to charge GST. Consumers, on the other hand, can use Bitcoin to buy goods as long as the amount of Bitcoin they are using is below $10,000. For amounts above this value, it seems that there may be capital gains implications, and certainly this would be the case for businesses.

Businesses will have to keep records of all Bitcoin transactions and paying someone a salary in Bitcoin will also attract Fringe Benefits Tax.

What does the ruling mean for Bitcoin in Australia?

The question is whether this ruling will have an overly negative impact on the use of Bitcoin. From a rational and unemotional perspective, the answer would have to be no.

Being charged an extra 10% on a purchase of Bitcoins is actually not a disincentive for a currency whose value can fluctuate by a great deal more in a single day. The value of Bitcoin has dropped by 18% over the past week for example. If you are buying Bitcoin then you are mentally prepared for the volatility and an extra cost up-front would just be factored into the overall decision to buy.

From a merchant’s perspective, if they are using a service to handle Bitcoin transactions, then most of the record keeping and exchange rates would be handled for them, as would the ability to add GST.

Whilst doing this for selling small items like coffee might be an issue, the number of these transactions is so low that overall it will not make that much difference.

The idea that governments, or their financial institutions, will exhibit progressive thinking on the basis of promoting Bitcoin is clearly not going to happen. It is simply too small a concern and carries too much inherent risk for it ever to be a priority for governments. So we shouldn’t really express much surprise at the ATO’s announcement.