Bitcoin, introduced on 3 January 2009, is an electronic currency known as “cryptocurrency”. It is a form of digital public money that is created by mathematical computations and policed by millions of computer users called “miners”. In essence, it is electricity converted into long strings of code that have monetary value. Bitcoins are not created by any central banks, nor regulated by any government.
A Bitcoin is a data ledger file called a “blockchain”. Each blockchain has 3 parts – its identifying address (of approximately 34 characters), a history of who has bought and sold it (the ledger), and a private key which is a sophisticated digital signature to confirm each and every transaction for that particular Bitcoin file.
A Bitcoin is stored on a computer device of the purchaser’s choice, but the history of each Bitcoin owned or spent is publicly stored on the Bitcoin network where every user will be able to see every Bitcoin’s history. There are fees to use Bitcoins. However, there are no ongoing banking fees with Bitcoin because there are no banks involved. Fees are payable to 3 groups of Bitcoin services: the servers (nodes) who support the network of miners, the online exchanges that convert Bitcoins to dollars, and the mining pools that the purchaser joins.
The ownership of Bitcoin lies on the encrypted private key, without this private key, the transaction cannot be authorised and Bitcoins cannot be spent. If the private key is lost, the ownership of Bitcoin is effectively lost.
The ATO has published various rulings that explain:
- TD 2014/25: Is Bitcoin a foreign currency for the purposes of Division 775 of the Income Tax Assessment Act 1997? The ATO view is that Bitcoin is not a “foreign currency” as it does not satisfy the ordinary meaning of money.
- TD 2014/26: Is Bitcoin a CGT asset for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997? The ATO considers that Bitcoin holding rights amount to property and as such it is a “CGT asset”.
- TD 2014/27: Is Bitcoin trading stock for the purpose of subsection 70-10(1) of the Income Tax Assessment Act 1997? The ATO considers that when held for the purpose of sale or exchange in the ordinary course of a business, Bitcoin is trading stock.
- TD 2014/28: Is the provision of Bitcoin by an employer to an employee in respect of their employment a property fringe benefit for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986? The ATO considers that the provision of Bitcoin by an employer to an employee in respect of their employment is a property fringe benefit. Bitcoin is not tangible property nor is it real property, and Bitcoin holding rights are not a chose in action. Bitcoin is not money but is considered property for tax purposes and satisfies the definition of a “non-cash benefit”.
- GSTR 2014/3: The GST implications of transactions involving Bitcoin. The ruling states that a transfer of Bitcoin is a “supply for GST purposes” as Bitcoin is not “money” for the purposes of the GST Act. It also states that a supply of Bitcoin is not a “financial supply” and therefore is not input taxed. An acquisition of Bitcoin will not give rise to input tax credits.
In TD 2014/26, the ATO has stated that a person holding a Bitcoin is considered to hold a “CGT asset” for the purposes of subsection 108-5(1) of the ITAA 1997. The disposal of Bitcoin to a third party gives rise to a CGT event. A taxpayer will make a capital gain from the CGT event if the capital proceeds from the disposal of the Bitcoin are more than the Bitcoin’s cost base. The capital proceeds from the disposal of the Bitcoin are the money received or the market value of any other property received (or entitled to be received) by the taxpayer in respect of the disposal. The money paid or the market value of any other property the taxpayer gave in respect of acquiring the Bitcoin will be included in the cost base of the Bitcoin.
Investments in Bitcoin, since its inception, have attracted the watchful attention of authorities as the transactions of Bitcoins are not monitored and may trade outside regulated guidelines. Trustees of SMSFs should adopt a conservative approach in considering Bitcoin as part of the SMSF’s investment strategy.
SMSF trustees considering holding Bitcoin as an investment need to ensure:
- the SMSF’s trust deed and the investment strategy allows for Bitcoin or other online/virtual/crypto currency can be held as an investment;
- that the SMSF, as the holder of Bitcoin obtains their own Bitcoin address, and the blockchain ledger maps that address,
- that the Bitcoin history appears with time stamps, so that Bitcoin transactions are readily identifiable.
Example 1
The unit of measurement of Bitcoin is BTC. That is, 1 unit of BTC = 1 BTC. There is daily market price for Bitcoin available.
If on 30 June 2017, the market price for BTC in US Dollars is $2,420 over an exchange rate of 0.7780, then in Australian dollars, $3,110 is the total market value of the Bitcoin investment.
If the market price at 30 June 2016 for BTC is USD $674, then the equivalent to AUD will be $858 using an exchange rate of 0.7855.
The SMSF, therefore, has an unrealised gain of $2,252 for 1 BTC.
Example 2
An SMSF purchased the Bitcoin on February 11, 2016 for USD$378 (i.e. AUD$507 using an exchange rate 0.7444). On 10 July 2017, the SMSF sold 1 BTC for USD$2,318 (i.e. AUD$2,913 using an exchange rate 0.7955).
There is a capital gain of $2,406 ($2,913 – $507) subject to CGT discount.