Taxing cryptocurrency

When Bitcoin first popped up a few years ago, government officials didn’t know whether to treat the cryptocurrency as cash or an asset like gold or real estate.

It’s a small distinction that carried a big impact on taxes.

In 2014, the Australian Tax Office (ATO) made a draft ruling that bitcoins and other cryptocurrencies were not money or a foreign currency and therefore assets were subject to the Goods & Services Tax (GST) when acquired. The tax office viewed Bitcoin transactions as barter arrangements so buyers had to pay the GST.

"Tax laws never expected that people would create their own types of currency," said Joel Emery, a researcher at ANU College of Asia and the Pacific (CAP) who analysed cryptocurrency tax regulations.

"Bitcoin doesn’t perfectly fall into the category of money or commodities or some other type of asset, which makes it difficult for regulators."

Emery decided to write his honours thesis on the tax implications of cryptocurrencies in 2014 but found little information about it, especially in Australia. Bitcoins not only were new but the technology behind them was complex.

Bitcoins and other cryptocurrency rely on blockchain, an electronic ledger of bitcoin transactions that can be viewed publicly and very difficult to alter retroactively. Owners of Bitcoin use a private key – usually a 64-character string of letters and numbers – when selling their bitcoins to buyers. No third-party keeps track of transactions, and owners who lose their keys also lose their bitcoins.

Emery and his academic supervisors at CAP submitted papers to Parliament in 2014 that supported the idea of treating Bitcoin as currency to avoid double taxation. They also advocated that regulations should be placed on cryptocurrency intermediaries such as brokers rather than bitcoin owners. Additionally, ANU researchers participated in roundtable discussions on cryptocurrencies at Parliament House.

Ultimately, the ATO changed its policy in line with other nations and labelled Bitcoin as "money" so that purchasing cryptocurrencies would not trigger the GST. The tax office said its decision that took effect in 2017 made it more attractive for Australian digital currency businesses to operate.

Cryptocurrencies will continue to test policymakers in new ways. Not only has bitcoin’s value exploded from under $1 apiece in 2011 to reaching $10,000 six years later, in 2017, but companies have started to sell cryptocurrencies to raise capital in lieu of stock offerings.

Emery didn’t expect bitcoin to become a billion-dollar industry so quickly and was more intrigued about the intersection of tax laws with new technologies. He was surprised by the interest from the government and media about his tax analyses of Bitcoin.

"I didn’t expect working on an honours thesis as having as much an effect as it did," Emery said.

Research funded by: Australian Treasury Department

Related website: Tax and Transfer Policy Institute

Updated:  24 April, 2017/Responsible Officer:  Dean, ANU College of Asia & the Pacific/Page Contact:  CAP Web Team