ATO ruling could put Bitcoin on the board agenda

Bitcoin is set become a topic in boardrooms as the Australian Taxation Office (ATO) prepares to release a ruling on whether it is a “currency” for tax purposes or not.

In the US, the Internal Revenue Service has issued guidance on Bitcoin, viewing it as consideration for tax-related transactions which could also give rise to a capital gain or loss when sold or exchanged.

At present, the uncertainty as to whether Bitcoin is a currency or a good has placed question marks around the future of its usage.

However, LegalVision CEO Lachlan McKnight believes directors should be thinking about their approach to Bitcoin as a payment method from a business perspective.

LegalVision, an online legal service, became the first Australian law firm to accept payment using the virtual currency in February 2014.

“It will be great to finally know where we stand from a tax point of view,” says McKnight. “We’ve been taking payments in Bitcoin for a few months now and we’re unclear on how the payments should be treated.”

He believes business-to-consumer organisations with international customers, in particular, should be looking to implement Bitcoin payments where possible.

“As Australian regulatory bodies such as AUSTRAC, the Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA) and the ATO continue to rule and comment on the use of Bitcoin, [its]legitimacy becomes more entrenched,” he says.

“The use of Bitcoin as an alternative to traditional currencies is a phenomena which ultimately benefits consumers. Rather than paying large foreign exchange fees, individual consumers can now seamlessly make cross border payments. A wide range of Australian businesses are in a position to service these consumers; setting up a Bitcoin account is very easy. Ultimately Bitcoin promises to reduce transaction costs and thus benefit both companies and consumers.

“Customers are increasingly looking for opportunities to pay in Bitcoin and those organisations that provide customers with the choice they’re looking for are likely to grow.”

McKnight believes the key questions most boards should be looking at relate to tax compliance. “If your organisation is taking Bitcoin payments, is it paying tax in line with ATO regulations? In particular, if the ATO does rule that Bitcoin is a “foreign currency” for the purposes of Division 755 of the Income Tax Assessment Act 1997, the disposal of Bitcoin will be deemed a designated foreign exchange realisation event. This will mean the disposal will need to be treated under a special set of rules for tax purposes. Boards should be making sure that their organisation’s auditors are on top of the relevant rules.”

At the end of the day, McKnight says boards need to feel comfortable that management is attuned to the rapidly changing regulatory framework. “If your organisation is taking payment or otherwise transacting in Bitcoin, make sure management is working with both legal and accounting advisers with a knowledge of the space.”

He says if the ATO does rule that Bitcoin is a “foreign currency”, the sale of the cryptocurrency (the term used to describe a medium of exchange designed around securely exchanging information) will be deemed a designated foreign exchange realisation event. “Such sales will need to be accounted for in the appropriate way. From a legal perspective, it’s vital that organisations stay vigilant. Australian regulatory authorities have commented and ruled on various issues relating to Bitcoin, but there is no guarantee that the current approach taken will not change. Make sure your organisation keeps abreast of ATO and ASIC rulings in particular.”

Cyber attack 25 June