Bitcoin hit with tax blow in Australia

Purchases of bitcoin will now be viable for sales tax, making life more difficult for startups

A Bitcoin sign is seen in a window in Toronto.
Bitcoins are accepted by merchants such as this store in Toronto. Photograph: Mark Blinch/Reuters

Australia’s tax authorities have ruled that bitcoin transactions are subject to the goods and services tax (GST), suggesting that the cryptocurrency is not likely to be classed as “money” in the near future.

The ruling mainly applies to Australian businesses running bitcoin exchanges, which let customers trade real money for the digital currency. The decision means that when bitcoin is bought from an exchange, it will have to pay GST on the supply of bitcoin.

GST does not usually apply to financial transactions, meaning that a conventional money exchange does not have to charge the tax when Australians buy foreign currency.

“A transfer of bitcoin from one entity to another is a ‘supply’ for GST purposes,” the Australian Tax Office said. “The exclusion from the definition of supply for supplies of money does not apply to bitcoin because bitcoin is not ‘money’ for the purposes of the GST Act.”

The tax will make running a bitcoin exchange in Australia an expensive proposition, because it is due on the total amount of bitcoin supplied, rather than on the cut the exchange takes above the market value.

However, the way an exchange actually operates will make a difference. Bitcoin “trading platforms” are liable for much less GST under the new rules. The difference lies in whether the company buys and sells bitcoin itself, or merely facilitates transactions between third parties in a manner akin to a stock exchange. If it is the latter, then GST is only due on the percentage commission the exchange charges - not on the total amount bought.

The ruling also complicates transactions involving spending bitcoin, requiring sellers that accept the currency to treat it as a “taxable supply”, rather than simply money exchanged for goods and services.

The office’s rationale for treating bitcoin in this way is that “bitcoin is not a legally recognised universal means of exchange and form of payment by the laws of Australia or the laws of any other country. Therefore, it is not ‘currency (whether of Australia or of any other country)’ under paragraph (a) of the definition of ‘money’.”

Not every country has decided to treat bitcoin in this way. Britain abolished VAT on bitcoin trades in March, although it avoided declaring bitcoin a currency. Nonetheless, the UK now treats bitcoin almost identically to conventional currencies, and buying bitcoins is no longer subject to VAT.

In December, New York state followed suit, ruling that sales tax was not due on purchases of bitcoin, and again avoiding explicitly declaring bitcoin a currency.

Australia hinted it would be taking the opposite approach in a draft ruling in August, and businesses have been steeling themselves for the final decision. CoinJar, a bitcoin wallet provider and one of Australia’s largest bitcoin firms, relocated to London in the wake of the draft ruling, while some smaller firms have decided to close.

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