Tax and Bitcoin — Investment in Bitcoin

Tax and Bitcoin — Investment in Bitcoin

Investment in Bitcoin should be treated as any other investment in an emolument, “which could be converted into money might reasonably be regarded as money”, and taxed under the same provisions.

1.1 Mining Bitcoin

Bitcoin mining is a competitive business. Mining only makes sense when done very efficiently and for a profit. Mining contracts are sold, and are used in securing the network.

In Steele v DFC of T (1999) 41 ATR 139 it was held that the expenses were to be treated as allowable deductions, if the taxpayer could satisfy the element that he had the objective of deriving income in the future (i.e. in this instance it would be from the mining of Bitcoin). If a “miner” seeks to engage in a business of mining Bitcoin for profit, the expenses directly related to that enterprise should be deductible as a business deduction.

In FCT v Finn (1961) 106 CLR 60 Dixon CJ stated:

When the forgoing elements are considered in conjunction, they do seem to form a firm foundation for the conclusion that the expenditure was in gaining or producing assessable income.

It is our submission that the same rule applies to Bitcoin-based transactions.

1.2 Trading in Bitcoin

The trading in Bitcoin is analogous to foreign exchange trading, and should be taxed under the same provisions. This includes capital gains and provisions such as ITAA97 s 775–30 and the issues decided in TC of T v Munro (1926) 38 CLR 153.

1.3 ITAA97 Section 26BB: Gains on Disposal of Traditional Securities

Where a taxpayer carries on a business that involves dealing in securities, gains made on the realisation of the securities are of an income nature, assessable under ITAA97 s 6–5. Similarly, in the case of financial intermediaries, commercial houses, or insurance companies gains made in the reorganisation of investments or even the shifting of investment activity to a subsidiary are likely to be income in nature. In the hands of dealers in securities and shares, the items are trading stock.

Section 26BB applies to ‘traditional securities’ being bonds, debentures, etc, but not securities to which Div 16E applies, and not shares or trading stock. In effect, a traditional security is any instrument that is not a qualifying security. It follows that s 26BB applies to gains made on the disposal of securities that do not have an ‘eligible return’, or if the return is less than the 1.5% benchmark. Its effect is to assess any gain realised upon redemption.