Australian Tax Office Explains Bitcoin, Intends to Tax it

The Australian Tax Office has demonstrated a clear understanding of bitcoin in an individual letter to a local startup.

AccessTimeIconMar 14, 2014 at 11:36 a.m. UTC
Updated Sep 11, 2021 at 10:32 a.m. UTC
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The Australian Tax Office (ATO) has provided businesses with some more guidelines on how it intends to deal with bitcoin, stating that income and profits derived from bitcoin transactions are taxable.

The letter, sent to an Australian bitcoin entrepreneur in response to a request made last June, was a private ruling to specific questions and noted its contents were valid only to that case. But it gives digital currency businesses in the country a better idea of how they should act to comply with tax regulations.

The first question asked if transferring bitcoins to a private company in return for shares would count as income, either ordinary or that from a for-profit undertaking. The answer was simply "Yes".

As to whether transferring bitcoins to another party would be subject to Goods and Services Tax (GST), the answer was also a one-word "Yes".

Bitcoin profits would also be subject to capital gains tax, though deductions depending on the individual case would apply.

Clear understanding

The letter also laid out a series of explanations showing the ATO has a fairly clear understanding of what bitcoin is, as well as the technology and processes behind it.

It acknowledges that bitcoin is "based on an open source cryptographic protocol, which is not under the control of a central authority".

According to the ATO's definition:

"A Bitcoin is a numerical amount that is allocated to a ‘Bitcoin address’. A Bitcoin address is a long string of numbers and letters, each one unique. The process through which Bitcoins are created and enter into circulation is called Bitcoin mining.

Mining involves using freely downloadable Bitcoin software to solve complex cryptographic equations that essentially verify and validate blocks of Bitcoin transactions. The first ‘miner’ to successfully solving an equation receives a specified number of newly created Bitcoins as a reward to their Bitcoin address.

Accordingly, Bitcoins rely on a network of Bitcoin miners using the system to validate transactions and collectively implement a replicated ledger of Bitcoin transactions. The security of this ledger is protected by this mining process.

Bitcoins are circulated using a peer-to-peer computer network. Bitcoin users store their Bitcoins in a software program called a ‘Bitcoin wallet’.

A transaction involving Bitcoins requires an account, which is in essence a ‘public-/private-keypair’. A Bitcoin address derived from the public key is used to identify the account. To transfer Bitcoins to an account a transaction is created with the address of the account as the destination. To send Bitcoins from an account, the transaction has to be signed with the private key associated with the sending account."

It also identified that participants in the bitcoin economy did so with the intention of making money, particularly those who mined:

"You invested a substantial amount of money in computer hardware and advanced scientific computing systems with the purpose of making substantial profit from mining and selling Bitcoins."

An ATO representative had said in early February that the department would publish guidelines on bitcoin for the current tax year, which ends in June. Transactions would be taxed according to their value in Australian dollars.

Permissive atmosphere

Australia has provided some of the more level-headed responses to bitcoin and bitcoin business so far. Compared to other nations, warnings from Australia's regulators have been comparatively mild and so far unofficial.

While the country's corporate banks have reacted in different ways, there have been no central bank moves to block those banks or other financial institutions from working with digital currency. There are no longer any government-owned banks in Australia.

So far the response has been similar to that of Singapore, which has also provided some guidelines on how bitcoin businesses should approach tax time.

Melbourne image via Shutterstock


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