As Bitcoin becomes more widely adopted around the world, revenue authorities in all jurisdictions are grappling with the tax outcomes for businesses and consumers who use Bitcoin.

The Australian Taxation Office (ATO) is currently forming its position, with a view to releasing guidance in the near future.

The Bitcoin system

Fundamentally, Bitcoin is an online public ledger system. A simplified overview of transactions under the Bitcoin system is as follows:

  • each user has an account, which is controlled by a private key (ie a secure password)
  • there is no cost to create an account, and it can be done by anyone with internet access in a matter of minutes
  • each account is identified by a public address, but the account can only be accessed and controlled with the private key
  • each user can send bitcoins from their account to any other user, and
  • users on the network work together to confirm and verify transactions between accounts.  Everyone can observe transactions between accounts, but the identity of the account holder is not public.

The GST issue

Although there are also important income tax and Capital Gains Tax questions for Bitcoin, the most pressing issue is how the Goods and Services Tax (GST) system applies to Bitcoin transactions.

Difficulties will arise if Bitcoin does not fall within the definition of “money” under the GST Act.

For example, if a business which accepts bitcoins from its customers needs to convert bitcoins in Australian Dollars, it would involve making a taxable supply of bitcoins to a Bitcoin exchange.  Business-to-business transactions involving Bitcoin would be barter transactions, with added administrative burden. Anomalous outcomes would arise in Bitcoin dealings with unregistered parties, including  consumers.

Why Bitcoin should be treated as money under the GST Act

There are a number of strong arguments that Bitcoin falls within the general meaning of “money”, but that issue is beyond the scope of this article. However, in any case, Bitcoin should be treated as “money” under the GST Act because:

  • the fundamental operation of the GST system, as a “practical business tax”, is to apply GST to supplies, and not to consideration for supplies
  • the operation of the GST system in this way is supported by the definition of “money”
  • on balance, the definition of money in s 195-1 of the GST Act effectively includes Bitcoin under para (e)
  • there would be anomalous GST outcomes, plus a significant compliance burden for taxpayers and an administrative burden for the ATO, if Bitcoin is not treated as money, and
  • an interpretation that Bitcoin is “money” under the expanded definition under the GST Act would not necessitate or imply the same conclusion in respect of the general meaning of money – for example, under corporations, banking or other regulatory regimes – meaning that the ATO could adopt a sensible, practical approach without disturbing the potential interpretations for other areas of law.

Operation of the GST Act – tax supplies, not consideration

The operation of the GST Act is based on the widest possible definition of “supply” together with the application of a  number of exclusions.   One of the most important exclusions is to exclude “money” from being a supply and from being an acquisition (except for money exchange transactions).

A supply of money is outside of the GST system in order to prevent GST from inappropriately being applied twice to one transaction. The Explanatory Memorandum to the Bill introducing the GST Act states at para 3.7:

“Money that is provided as consideration (payment) for a supply is not in itself a supply – subsection 9-10(2). Otherwise money supplied as payment for a supply could be a taxable supply in itself.”

A fundamental premise of the GST system is that the payment of money for a supply should not in itself be treated as a supply. Therefore, the operation of the GST system requires a sensible interpretation of the definition of money. The GST system is not intended to apply to consideration which is, in the context of the transaction, nothing more than a medium of exchange which facilitates the transaction.

The only use of bitcoins in a transaction is as a medium of exchange.  Regardless of the general definition of money, the purpose of bitcoins is to function as money within the economy.  They have no other purpose or use.    Bitcoins also share similar characteristics to other forms of money. Just as an Australian Dollar transaction can be quantified in a combination of dollars and cents, one bitcoin is divisible decimally, down into a base unit of one 100,000,000th of a bitcoin (commonly known as a “satoshi”).

Definition of “money” supports this interpretation

The definition of money in the GST Act is an inclusive definition, which is intended to expand the ordinary meaning of the word.  It modifies the general definition of the word “money” by:

  • including things and systems which are used as a medium of exchange but are not money as traditionally understood – eg promissory notes, negotiable instruments, and account based transactions, and
  • excluding things which are money as traditionally understood but are not being used as money – eg collectors’ notes and coins.

The intention of the GST definition of money being structured this way is to include things used as money and to exclude situations where money is not being used as money.

The broad introductory words used in para (e) of the definition are consistent with the intention to treat as money,    anything which facilitates payment in one of the ways stated in the sub-paragraphs. The use of the words “whatever is supplied” is necessarily broad, in order to deal with all possible rights and obligations that may arise when payment is made by one of the ways described in the sub-paragraphs.

The use of these words is consistent with the intention to classify these means of payment according to their true substance, without unnecessary analysis of any incidental legal rights and obligations which arise in the course of execution of these payments.

This broad definition of money is required to support the fundamental operation of the GST system by correctly classifying things which are used as consideration or payment. It correctly classifies these things by reference to their use and purpose in the context of the transaction, rather than their legal form.

Definition of “money” includes Bitcoin under paragraph (e)

Paragraph (e) of the definition of “money” in s 195-1 includes:

(e) whatever is supplied as payment by way of:

  1. credit card or debit card; or
  2. crediting or debiting an account; or
  3. creation or transfer of a debt.

At a fundamental level, a Bitcoin transaction involves the crediting and debiting of an account – debiting (reducing) the number of bitcoins recognised in the account used by the payer, and crediting (increasing) the number of bitcoins recognised in the account used by the recipient, by a corresponding amount.

The definition of the word “account” is only found in the GST Regulations, not the GST Act.  Parliament’s intention is clearly that this definition should only apply in the context of the financial supply provisions, and not to the GST Act itself.  This is accepted by the ATO in GSTR 2002/2 at para 206.

A supply of bitcoins is therefore a supply of money because it falls within para (e)(ii) of the definition of money.

Bitcoin as a financial supply for GST purposes

In order to prevent the unintended operation of the GST Act where bitcoins are exchanged for Australian Dollars, a sensible, practical interpretation is needed – that a supply of bitcoins is a financial supply, under either:

  • item 1 of GST Regulation 40-5.09 (an account), or
  • item 9 of GST Regulation 40-5.09 (a currency).

Unless a supply of bitcoins is treated as a financial supply, there would be an anomalous and inconsistent result in situations where:

  • a private individual buys bitcoins from a Bitcoin exchange – where the exchange makes a taxable supply and the individual cannot claim an input tax credit (GST cost), and
  • a GST registered entity buys bitcoins from a Bitcoin exchange – where the exchange makes a taxable supply but the entity can claim an input tax credit (either an unintended distortion of the market price, or a GST liability for the supplier and a windfall input tax credit to the recipient of the bitcoins).

There would also be an anomalous and inconsistent result between situations where a GST registered entity converts bitcoins to Australian Dollars using:

  • an Australian based exchange (taxable supply), and
  • a non-resident exchange operating outside Australia (GST-free export).

In this situation, Australian Bitcoin businesses may simply use exchanges overseas when they need to convert bitcoins to other currencies, to the detriment of Australian exchanges.

As a specific example, the European central currency, the Euro, may, on a strictly legalistic interpretation, not fall within Item 9 of GST Regulation 40-5.09, because it is not the currency of a foreign country – but is rather a unified currency administered by the European Central Bank, which has been adopted as a currency by the Eurozone members. Clearly, a sensible interpretation of Item 9 includes the Euro. A similar interpretation is open in respect of Bitcoin.

As a further specific example, the ATO view of the term “account” as used in Item 1 of GST Regulation 40-5.09, which is set out in GSTR 2002/2, could be broadened to include Bitcoin, being a non-ADI account which satisfies the other criteria.


Although the financial supply interpretations are less clear cut, they remain open to the ATO. In any case, over time, amendment of the GST Act will need to be considered in order to properly deal with Bitcoin and other digital currencies in the Australian financial system. The ATO view of the tax implications of Bitcoin is awaited with interest.

The challenges presented by Bitcoin may well be a sign of things to come. Tax regimes will have to come to terms with more rapidly-evolving technology which challenges previously well-established concepts. Australia will have the opportunity to encourage local growth and investment by implementing considered tax policy which supports, rather than restricts, the use of emerging technology.

This article originally appeared in the Thomson Reuters Weekly Tax Bulletin on 27 June 2014