The rise of cryptocurrencies: Is Bitcoin the future of money?

Over the last few months it seems like cryptocurrencies are always in the news. However, they aren’t new and since 2009, have been labelled by many as the ‘future of money’. To keep it simple, we’ll look mainly at the most common cryptocurrency, Bitcoin. In 2009, one Bitcoin was worth less than one hundredth of an Australian cent – it now equates to $14,000 – but the daily fluctuations can be dramatic. What is Bitcoin and how is it taxed?

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Part of the interest in cryptocurrencies over the past few years has been as a result of their volatile value. In January 2017, the market capitalisation of cryptocurrencies was under $US20 billion, by January 2018 it had jumped to over $US800 billion and currently it is around half that – $US450 billion.

Despite all the media coverage, if you still don’t fully understand what is going on you’re not alone. Many may think of Bitcoin as a company or a stock, it’s not. When you invest in Bitcoin you are basically buying currency.

What is Bitcoin?

Bitcoin is a type of digital cryptocurrency that operates on a decentralised peer-to-peer network, with no central authority or government backing. It is essentially a piece of code, signed with a ‘personal key’, that is held in a digital wallet that is run through your computer. It is akin to internet banking, without having to deal with a bank or international currency exchanges.

This piece of code that is Bitcoin could be copied numerous times and reused if it wasn’t for the technology that makes cryptocurrencies possible, the blockchain.

What is Blockchain?

Blockchain technology is necessary as it records all the transactions ever made in the currency and who owns what coins. For a transaction to occur, it must be verified using a series of complex calculations made by computers of other users on the currencies network. Once verified, it adds a block to the chain, hence blockchain. This means that no matter how many times a coin is traded, it can always be traced back to where it originally came from.

Bitcoin and the mainstream economy

Bitcoin has had limited use in the mainstream economy partly because of the volatility of its price. The value of the currency might go up or down significantly between the time a deal is struck and delivery. The introduction of Bitcoin derivatives (futures contracts) will allow investors to manage this risk. Even so, Bitcoin is a very volatile investment.

The Bitcoin price spikes at the end of last year saw a range of rapid interventions from regulators around the world, including in Australia where the Australian Tax Office (ATO) is establishing a tax force to monitor cryptocurrency transactions.

Bitcoin has now become like a mainstream investment in one respect: the tax office expects a cut of the profits when you sell it.

The tax treatment of cryptocurrencies

So you have decided to buy (or sell) some cryptocurrencies. What does that mean for taxation?

Essentially the Australian Taxation Office sees Bitcoin as an asset, how it will be taxed depends on the nature of the transactions.

  • Bitcoin (or similar) for personal transactions: If Bitcoins are used to acquire goods or services for personal use, then it is taxed as a personal use asset, meaning any gain or loss is disregarded providing the cost of the Bitcoin is $10,000 or less.
  • Bitcoin (or similar) for investment: If you acquire Bitcoin as a capital asset (i.e. not short-term profit), the ATO believes Bitcoin would be subject to capital gains tax.
  • Bitcoin (or similar) for trading: The ATO’s view is that just like other assets, if you trade with the underlying intention to carry on a profit-making undertaking or business, then you are taxed on the full profit. If you are trading, you are essentially carrying on a business.
  • GST treatment: It is also important to note that sales and purchases of cryptocurrencies are no longer subject to GST as of 1 July 2017.

It should be noted that we have outlined the current view of the Australian Tax Office, however the tax treatment of cryptocurrencies is yet to be tested in a court of law and is not clear cut. Investors should be aware of the potential tax consequences of Bitcoin investments before proceeding.

We recommend consulting your local Accru advisor should you be thinking about investing in cryptocurrencies.

About the Author
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Mitchell Bell
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