Digital Currency Rules and Bitcoin's Future

The tax treatment of digital foreign currencies is a challenge for government authorities around the world, as it is for additional aspects of the “disruptive” digital economy.

In October 2014, the Commonwealth United states senate Economics Committee launched an inquiry into digital foreign currencies. The Committee released its report last week, with a particular focus on tax.  Last year, the ATO published several rulings outlining how bitcoin and similar cryptocurrencies should be treated under the Australian income tax and GST regimes.

The rulings supplied useful clarity on bitcoin’utes tax treatment, but the ATO’s approach received widespread criticism.  Bitcoin purportedly functions as money, but the ATO rulings treat bitcoin as a commodity for tax reasons. This disparity creates a number of tax inconsistencies.

The impact is especially acute under the GST routine, where bitcoin transactions are taxed as barter transactions. Australia’utes GST regime applies fairly clumsily to barter transactions, which might cause double taxation, or at best double tax administration, as we emphasised in our submission.

Why should the law be changed?

Imposing 10% Goods and services tax on bitcoin transactions increases the price of purchasing bitcoin from Australian suppliers, affecting the commercial stability of operating a digital currency business in Australia, as we possess highlighted before. Submissions to the inquiry outlined the potential advantages the industry could offer Sydney, but many argued the Goods and services tax treatment stood in the way of achievement.

From a regulatory perspective, helping Australian digital currency intermediaries to determine an industry here is likely to make financial supervision and taxation easier for government.

The ATO’s characterisation of digital currencies like a commodity is probably the best interpretation of the current law, which emphasises broad use and sovereign backing for currencies. However, it is not clear-cut. There is a legal basis to treat electronic currencies as money according to their function as a medium associated with exchange, especially as this gets to be more widespread.

Digital currency and GST

The United states senate report identified the GST anomalies arising from the ATO’s characterisation of digital currencies also it recommends the government amend the GST regime to treat electronic currencies as money. This could promote fairness and neutrality in the taxation of both contemporary and traditional forms of money.

Implementing the necessary changes to the GST Act and Regulations may ultimately require approval from the Earth and all State governments, because it affects the GST foundation.

Adopting the report’s GST suggestion would bring Australia’s GST therapy in line with the UK, and some other EU nations. Last year, the united kingdom changed its VAT laws and regulations (the UK’s GST) to exclude digital currencies from taxation as a commodity.

When the united kingdom first introduced this approach, it was praised for supporting the local digital currency industry, while there is little empirical evidence at this early stage.

Digital currencies are also handled by the ATO as commodities with regard to income tax. The evidence before the Panel, although limited, suggests the majority of bitcoin holders are investors not traders.

The report did not suggest any alterations to the income tax treatment at this stage – and we agree that caution is needed prior to altering income tax treatment. The report recommended further study to determine whether change is needed.

The regulatory future of digital currencies

The Panel concluded that digital currencies drop outside the scope of many associated with Australia’s financial, banking, as well as consumer protection regulations. This recommended that Australia’s anti-terror as well as anti-money laundering regimes should be extended to ensure they encompass digital currency activity.

However, the statement does relatively little to address the longer-term regulatory concerns surrounding digital currencies. At this initial phase, the report proposes to allow the industry to self-regulate, with oversight from a proposed “Digital Economic climate Taskforce”, rather than introducing a specific regulatory framework.

The Committee accepted which extensive regulations might stifle the growth of the digital forex industry. Although digital currencies’ utility has been emphasised recently, their own future remains uncertain. Bitcoin, the biggest digital currency, has seen a steady, significant price decline over the past two years. Further, much of the industry’s innovation comes from little start-ups, which have relatively few sources to comply with regulations. Regulating simplicity seems proportionate at this stage.

It will be interesting to see how effective the self-regulation approach is actually, particularly given digital currencies’ historical involvement in illicit actions and the regulatory concerns been vocal by other governments and also the OECD.

The combination of introducing a more favourable GST treatment and a relatively simple regulatory framework will hopefully foster this nascent industry’s development. If the industry experiences any major growth in Australia, the greater number of users (and more tax dollars at stake) may heighten regulating attention surrounding the technology.

Ultimately, the actual self-regulatory approach and Digital Economy Taskforce is the beginning, not the end, of the government’s involvement in regulating and taxing this new technology.

Around the world, regulators are realising Bitcoin is cash is republished with permission from The Conversation