ATO's Bitcoin ruling is 'out of step with reality'

The Australian Tax Office's decision to exempt everyday Bitcoin investors from being taxed for their use of the crypto currency has been labelled "out of step with reality" by not-for-profit tax advisory body Taxpayers Australia.

In August the ATO released its long-awaited guidance on how it will treat Bitcoin for tax purposes, ruling Bitcoin and other crypto currencies were not Australian or foreign currency for tax purposes.

It labelled Bitcoin as akin to 'barter', and decided that therefore, non-business trading of the currency would not be assessed as part of a person's income.

The ATO's stance - which the agency says is on par with other countries like Canada and the USA - has been criticised by Taxpayers Australia in a submission to the ruling for being "willfully out of step with economic reality”.

Taxpayers Australia said Bitcoin is used as currency and therefore shoud be treated as such.

It urged the ATO to reconsider its "excessively legalistic view of what constitutes ‘money’ and ‘currency’" so the "economic substance" of Bitcoin transactions was not ignored.

"By running the argument that Bitcoin is not yet commonly in use as currency in the community, the Tax Office is leaving itself exposed to a requirement to change the law whenever Bitcoin usage reaches the Tax Office's arbitrary threshold for ‘common usage’," Taxpayers Australia’s head of tax Mark Chapman said in a statement.

The body argued the Tax Office had made the ruling without considering that "legal definitions and applications will and must evolve as methodologies and/or technologies change" and definitions used in taxation law can differ from those applied in general law.

"The Tax Office’s draft ruling on the tax treatment of Bitcoin seems to have been concocted with both of the above principles turned on their heads, and with little by way of explanation from the Tax Office as to why it has departed from such a well-accepted position," Taxpayers Australia tax specialist Letty Tsoi added to the submission.

"The first issue — that legal definitions are expected to evolve as society and the realities with which people live changes (in this case because of technology) — seems to have been either completely ignored by the draft ruling on Bitcoin, put in the too hard basket, or deemed not important enough to be dealt with in official guidance."

The reality, Tsoi wrote, is that "no matter how deep the Tax Office’s fingers are planted in its ears...millions of dollars worth of transactions have been and will continue to be processed using Bitcoin".

The ATO's position puts Bitcoin in the same taxation category as traded assets which do not incur capital gains tax under the $10,000 personal use cap.

Business use of Bitcoin will be subject to different treatment, however. The ATO's guidance states that businesses receiving Bitcoin as payment will need to declare the transactions (in dollar value terms at the time they are made) as part of taxable income.

Fringe benefits tax will be applied to employee salary payments in Bitcoin if processed under salary sacrifice, and Bitcoin miners will start to attract tax if their activities are deemed to be professional.