Part 1 of our series on bitcoin looked at the tax consequences for those who invest in bitcoin on a personal level. Here, in Part 2, we examine the tax consequences for businesses that buy and sell bitcoin, those who mine bitcoin, and what happens when you use bitcoin in transactions.
Buying and selling bitcoin as a business
What about if you decide to go big and start a business of buying and selling bitcoin?
According to the ATO, the proceeds you derive from the sale of bitcoin are included in your assessable income and any expenses incurred are allowable as a deduction.
The bitcoin in this situation is treated as trading stock and you are required to bring to account any bitcoin on hand at the end of each income year.
If you are running a business and your turnover is $75,000 or more, you will normally be required to register for GST. However, bitcoin is considered to be an input taxed sale, which is not included in GST turnover. Hence, if your business consists solely of making sales of bitcoin, you would not need to register for GST. Although you may still choose to register taking into consideration such factors as being able to claim reduced GST credits in certain circumstances, and other taxable sales or creditable purchases you may make.
You may have heard that bitcoin can be mined. The process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle with the participant who solves the puzzle first claiming a set amount of bitcoin. Anyone in the business of mining bitcoin would have to include income derived from the transfer of the mined bitcoin to a third party. The expenses related to the mining activity would be allowed as a deduction. Note that according to the ATO, the non-commercial loss provisions may apply to limit the losses you can claim from the bitcoin mining activity against other income. Again, the mined bitcoin would be considered to be trading stock and there may also be GST consequences in relation to the supply of bitcoin.
Where you carry on a business and dispose of bitcoin as a part of that business, there may be capital gains tax consequences. However, the capital gain may be reduced by the amount that is included in the business’ assessable income. The ATO requires records to be kept for such transactions, including the date of the transaction, the amount in Australian dollars taken from a reputable online exchange, the purpose of the transaction and details of the other party to the transaction.
Using bitcoin in transactions
Where you use bitcoin for business transactions, such as providing goods or services in return for bitcoin, you need to record the value in Australian dollars as a part of your income. This value is fair market value and should be obtained from a reputable bitcoin exchange. You will also be required to remit GST as 1/11th of the payment received for any taxable sale. This will need to be reported on your activity statement and the amount reported has to be in Australian dollars. When you purchase business items using bitcoin, you may be entitled to a deduction based on the arm’s length value of the item acquired. In addition, using bitcoin as a method of payment incurs the same GST consequences as using money as payment, that is, there will be no GST.
You could even use bitcoin to pay employees’ salary and wages. In instances where an employee has a valid salary sacrifice arrangement with you as the employer to receive bitcoin as remuneration instead of Australian dollars, the payment may be subject to fringe benefits tax (FBT). However, where a valid salary sacrifice agreement does not exist, the remuneration is treated as normal salary and wages and you as the employer will need to meet PAYG obligations.
Want to find out more?
If you would like to find out more about the specific tax and GST consequences for your bitcoin business, or would like some advice on effective salary sacrificing arrangements or how to implement one, talk to us today.