Bitcoin mania has reached peak media saturation. Six years ago the value of one Bitcoin was roughly $1 AUD, however, as of December 2017 one unit of Bitcoin was valued at $22,626 AUD.
Naturally such volatility has led to considerable speculation about a ‘Bitcoin bubble’. Regardless, Governments around the world are racing to regulate crypto currencies. Whatever happens to Bitcoin, digital currencies and block chain technology are expected to play a key part of the future of the financial sector.
As Bitcoin enters the mainstream, amid growing interest by adventurous investors, it will be increasingly important for financial planners and accountants to learn the ins and outs of dealing with these assets.
A Quick Glance at Crypto Currencies
In 2008 Satoshi Nakamoto, whose identity is still not verified to this day, published a paper outlining Bitcoin as a decentralised digital cash system. Crypto currency, by definition, is a form of digital currency that uses cryptography for security as opposed to a centralised third party such as a bank.
When a transaction is made using a crypto currency, like Bitcoin, a peer-to-peer network of ‘miners’ verify the transaction as legitimate and it is added to the end of a chain of other verified transactions. This chain is known as the Blockchain, and is immutable and unchangeable.
In order to verify a transaction, each miner competes to solve a cryptologic puzzle. After finding a solution, the transaction is confirmed and the miner is rewarded with a token.
To give you an idea of how secure this blockchain process is, it is more probabilistically likely that an asteroid will fall on your house than a Bitcoin will be compromised.
Since there is a limited supply of Bitcoin, only 21 million Bitcoin can be produced, it’s value increases over time as it continues to be bought.
Breakthrough or Bubble?
Bitcoin has had its share of converts and critics. Whilst shrewd investors like Warren Buffet have been quick to dismiss the new currency as “a bubble [that will] almost certainly come to a bad ending”, others, like forward-thinking Virgin Group founder Richard Branson, believe there is still promise.
Many have compared the rise in value of Bitcoin to the infamous “Tulip Mania” in 17th century Netherlands. The price of Tulips rose so high that a single bulb was worth as much as a house. Unfortunately for those who bought the Tulips, the price collapsed in 1637 and many lost a significant fortune.
The revolutionary nature of Blockchain as a technology, or ‘distributed ledger technology’ as it is also known, is what gives Bitcoin its value. Whether it retains its value in the future is to be seen.
Many Banks and Governments are experimenting with their own blockchain-based services; however, many are finding it hard to put into practice. The goal for these organisations is to adopt the blockchain technology to increase the speed and reduce the cost of activities such as settlement. However issues of scalability and immutability mean these innovations may still be a while away.
For now no one really knows how current digital currencies will fare in the future, or whether the value of popular digital currencies, like Bitcoin, are sustainable. But it is fairly safe to say that the crypto technology behind them will have a radical impact on the way we conduct transactions in the 21st century.
Tax Implications of Trading in Crypto-currencies
It is estimated that fewer than 14 million people around the world currently own Bitcoin. However, the growing interest in crypto currencies has led to a boom in investors in the currency. Other crypto currencies, such as Ethereum and Litecoin have also seen a dramatic rise in popularity.
The question, however, is what happens when Australians wish to withdraw their funds? What do you need to be aware of so as to avoid any trouble from the ATO? The answer depends primarily on your intentions.
If you are purchasing large amounts of Bitcoin, or any other crypto currency, for investment purposes it will be considered no different tax wise than any other investment.
In Australia, Bitcoin is considered a Capital Gains asset, and therefore any gains will be taxed as such. In cases where the investment has been held for more than 12 months you may qualify for a half price discount on any capital gains made from disposal.
However, Bitcoin may also be considered a personal use asset, and any capital gains disregarded, if the asset’s base cost is less than $10,000. Personal use assets are defined as assets kept for enjoyment or personal use. Whether you would qualify depends on your individual circumstances.
The final thing to consider when buying and selling digital currencies is GST. If you are a business that operates with Bitcoin, such as an exchange or as a trader, then you may be affected by trading stock rules. For more information, follow this link to the ATO website.
Future Regulation in Australia
According to Ernst and Young’s FinTech Australian Census 2017, digital currency exchanges currently make up 4% of the Australian FinTech landscsape
It has been rumoured that the Australian Transaction Reports and Analysis Centre (AUSTRAC) may be given powers to police digital currency exchanges where people buy and sell Bitcoin, Ethereum and other crypto currencies.
According to Director Gabriel Govinda of Melbourne’s Blockbid crypto currency exchange, “Increased regulation is welcomed, [and a lack of regulation is] one of the aspects that makes potential investor and traders wary.”
One the key areas to regulate will be the growing number of ICOs (Initial Coin Offerings) appearing on the market. ICOs are a form of crowd funding by selling tokens and crypto currencies to potential investors. There are fears that as growth continues, so may scams.
In September 2017, the People’s Bank of China placed a ban on ICOs, citing it as, “disruptive to economic and financial stability.”
It is not all doom and gloom for crypto currencies however. In June 2017, Australia removed a double taxation on digital currencies. Previously GST was paid for the purchase of currency and then again for services and goods.
According to John-Paul Thorbjornsen, CEO and cofounder of P2P marketplace CanYa, “the value [of removing double taxation] is the Australian Governement is sending a clear signal of support of crypto currencies.”
“This is currently positioning Australia as one of the leading countries that are ‘crypto-friendly’ and the sentiments across the global community certainly recognise this.
“However, businesses who operate in the crypto-economy still face significant hurdles, especially when it comes to banking support.”