Senate inquiry into the regulation of digital currency – a move in the right direction?
By Keely Fitzpatrick
Those who thought that the world of digital currency was beyond the reach of tax and other regulatory authorities have been living in a “Dark Fantasy”. Since our article earlier this year exploring the expansion of digital currencies and the Coinye saga of January 2014 the interest in digital currencies (such as Bitcoin) has continued to rise, along with community concerns at the lack of formal regulation.[i] One could say that digital currency is about to “Touch the Sky” (well, touch the Australian Senate at least).
ATO treats bitcoin transactions as barters
The ATO declared in August this year that it doesn’t consider Bitcoin (and similar digital currencies) to be money. But that doesn’t mean that Bitcoin transactions are easier than traditional currency purchases. Transactions involving Bitcoin will be treated as barter transactions. The Australian dollar transaction equivalent will need to be recorded. GST may be payable on Bitcoin transactions. Digital currency will be treated by the ATO as an asset for capital gains tax purposes. Bitcoin miners need to declare income from Bitcoin mining, and can claim tax deductions for mining expenses.
Since the ATO’s announcement, the Australian Digital Currency Commerce Association has been playing the “Blame Game”, raising concerns that digital currency trade will be driven underground or offshore to countries offering more favourable tax treatment. In particular, their concern relates to the imposition of GST when countries with similar tax systems (such as the United Kingdom) have not imposed a tax on supply of Bitcoins.
The business of Bitcoin has now also come to the attention of the Australian Senate. In October 2014, Senator Sam Dastyari won Senate support for an inquiry into the regulation and taxation of digital currencies. Whether Senator Dastyari is an avid Kanye fan who was burnt by the pump and dump of Coinye in January, or is simply a “Gold Digger” who is concerned about the impact of the ATO’s declaration on his personal income from Bitcoin mining is anyone’s guess, but following the popularity of digital currencies, this inquiry was “Bound 2” happen.
The Senate inquiry terms of reference include considering how digital currency should be defined for Australian tax law, how to balance regulation against promoting growth of the digital currency industry, the potential impact of digital currency on the Australian economy and how to ensure stability of the digital currency industry. No “Yeezy” task!
As part of this inquiry, focus will also be placed on use of digital currency for illicit purposes. Such a focus is necessary to mitigate the risk of investors being scammed in future Coinye-gates (at least in Australia), and to try to prevent anonymous digital currency being used to purchase illegal goods such as personal bank details and drugs (here’s looking at you, Silk Road).[ii] And since every digital currency is different and the ATO’s guidance only relates to digital currencies with ‘the same characteristics’ as Bitcoin, it is good to see that the Senate is specifically considering the definition of digital currency.
However, anonymity of Bitcoin users will present significant challenges for enforcement of any potential regulation. While the ATO may be able to identify some businesses using digital currency, identifying whether they are Australian and whether or not they are complying with Australian tax laws may be very difficult. What’s more, identification of individual Bitcoin miners and users may be effectively impossible.
Public submissions to the Senate Economics References Committee for inquiry closed on 28 November 2014 and the final report is due in March 2015.
Watch this space. We most certainly hope that the inquiry leads to digital currency making our economy (in the words of Kayne for good measure…) “harder, better, faster, stronger”!
*Note: Kayne puns intended.
[i] Coinye (originally called Coinye West) was a digital currency inspired by rapper Kayne West. Kayne, having no association with Coinye, filed a claim in the District Court in New York claiming trade mark infringement (among other things). 2014 has seen 10 of the named defendants lose by default judgment and 3 others settle, agreeing (in exchange for Kayne dropping the lawsuit), to be permanently banned from operating or using any website that uses the Kayne West, Coinye West or Coinye mark (or any imitation thereof).
[ii] The infamous Silk Road was an online black market, best known as a platform for selling illegal drugs. As part of the deep web it was operated as a Tor hidden service so that online users were able to browse Silk Road anonymously and securely without traffic monitoring. Trade in Bitcoin (the most well-known form of digital currency) was required in order to use Silk Road. This enabled a user to remain anonymous because involvement of banks, bank statements and the user’s legal name were not necessary as part of a transaction. Law enforcement seized Silk Road in October 2013, and shut down the successor site Silk Road 2.0 in early November 2014.