BTC & LTC: GST, VAT, TVA, IVA & PPN
Last week’s Meetup was about buying and selling Bitcoins, but as often is the case, discussions often wander across a range of interesting topics. That week someone asked about tax implications and I thought it was an important enough topic worthy of further investigation. We had two tax accountants in the audience so some of the general advice provided was quite revealing. I’ll try my best to summarise and expand on the comments made during the meetup.
Cryptocurrencies started out with a reputation as a exchange medium for criminals and drug dealers. Many early adopters saw it as an opportunity to get off the grid and evade the tax office’s eye. That time has passed, legitimate businesses are adopting the technology and legislation is slowly catching up to the technology. The problem is that misinformation is still rife and being wrong is bad for business. Potentially bankruptcy bad.
For example, many of the first generation of crypto entrepreneurs perceived Bitcoin as a currency that could not be taxed since it sat outside the jurisdiction of any single government and/or central bank. They bought and sold digital currency using a money services model similar to traditional payment processors and currency exchanges; 3 to 5% fee on value transferred or revenue from a small buy and sell spread. It was thought that like most services companies, taxation would only apply to company profits. As a bonus, Bitcoin et al weren’t considered currencies, so in theory these businesses did not require Australian Financial Services licenses or PCI DSS compliance and avoided the costs involved in independent audits and reporting to regulators. Unfortunately it’s very rare that you can have the best of both worlds.
Right now the official stance of many governments is that cryptocurrencies are commodities. Any exchange of cryptocurrency for goods or services is considered a barter trade. Based on current legislation, it is actually unlawful for the tax office to assess digital currencies as a ‘currency’. How does this change the taxation? Barter trades are subject to Goods and Services Tax (GST) or Value Added Tax (VAT). GST in Australia sits at 10% and is applied to any sale of goods or services that don’t fall under a short exclusions list (basic foods, education, etc). This means that there may be crypto payment providers in Australia have been buying and selling crypto currencies with a 5% profit margin, when their tax commitment is actually 10%! They are losing money with every transaction (assuming they pay their taxes).
On top of the additional tax implications, companies trading in goods are required to maintain a record of sales invoices. If asked, you would need to be able to provide details of all sales and transactions going back several years. My recollection is hazy, but I believe four key bits of information need to be stored;
- date of transaction,
- customer identity (in this case a bitcoin address might suffice),
- value of transaction (in fiat) and
- nature of transaction.
Most of this information can be derived from cross referencing block chain records against historical crypto currency valuations, however it would be much easier to maintain your own records.
Trading in crypto currencies would be easier in countries that adopt VAT instead of GST. In this scenario, taxation is only applied on the increase in value of the product you are selling, thus resulting in a smaller tax burden on exchanges & crypto payment providers. This would bring taxation more in line with the services model as the taxable component of the sale price would be limited to the margin charged for the service (assuming income was generated from the buy sell spread).
The good news is that people make mistakes and despite what you might think, the tax office can be reasonable at times. There will most likely be a grace period where businesses will be given time to adjust their operational model to reflect the official stance of the government. You just need to make sure you get this right now if you intend to continue operating with crypto-payments.
If you enjoyed this article and would like to further explore the topic, drop a question or comment below, or contact Lucas and we may host a Meetup dedicated to the topic and try to get some professionals to field questions. Who know’s, if the topic is important enough to our readers we may even lobby the government 🙂
Contributed by Kevin Purnama
Disclaimer: I am not a professional tax accountant and any information provided here is not considered financial advice. Please seek a tax accountant for professional advice. We may be able to recommend one that specialises in cryptocurrencies.