What is Ripple? Have you heard of Ethereum? What about Auroracoin?
The answer – these are cryptocurrencies.
The Oxford Dictionary defines “cryptocurrency” as “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”. Perhaps the most famous cryptocurrency is the first cryptocurrency – created only 5 years ago – Bitcoin.
There are many definitions of Bitcoin, but basically, Bitcoin is a payment system. Other cryptocurrencies that have the same characteristics as Bitcoin are payment systems as well. On 20 August 2014, the Australian Taxation Office (ATO) released guidance on the tax treatment of cryptocurrencies in Australia, specifically regarding Bitcoin. You can read the ATO’s guidance here.
According to the ATO, transacting with Bitcoin is akin to a barter arrangement, with similar tax consequences. The ATO specified that its view is that Bitcoin is neither money nor a foreign currency, and the supply of Bitcoin is not a financial supply for GST purposes, but Bitcoin is treated as an asset for capital gains tax purposes.
In the 21st century, we can use Bitcoin (or Ripple, Ethereum, Auroracoin plus many more other cryptocurrencies) to pay for personal or business transactions. Do you know Bitcoin can even be used to paying salary or wages? What you also may not know is that the ATO has a number of other resources relevant to the tax treatment of cryptocurrencies in Australia. These include Taxation Ruling No. IT 2668 on barter transactions, and Draft GST Determination GSTR 2014/D3 on the GST implications of transactions involving Bitcoin. You can access these resources here.
Cryptocurrencies are gaining traction not only globally but also locally, with an estimate of 50,000 users in Australia, as reported by the ABC on 22 August 2014. You can read the report here. This interesting piece of news item also reported that, while ATMs that accept and exchange Bitcoin already exist, a first-of-its-kind-in-Australia ATM has just opened in Canberra. This new ATM trades three major cryptocurrencies – Bitcoin, Dogecoin and Litecoin.
It is indeed time for all of us to learn more about cryptocurrencies.