Bitcoin was created in 2009 by Satoshi Nakamoto as the world’s first cryptocurrency and is the biggest. Currently there are 669 cryptocurrencies in the world.
Bitcoins are a digital currency so can be used to buy things electronically (and in that sense are similar to conventional currency). However, Bitcoins most important characteristic is that it is decentralised so no single institution controls the Bitcoin network. Bitcoins are not printed like dollars or euros – they are produced by people, and increasingly by businesses, running computers all around the world, using software that solves mathematical problems. This process is known as Bitcoin mining.
The tax consequences of using Bitcoin are as follows:
- Trading Bitcoin for a profit-making purpose will result in any profits being assessable income.
- Bitcoin is an asset for capital gains tax (CGT) purposes. Bitcoin held for 12 months may access the 50% CGT discount.
- Transacting with Bitcoins is akin to a barter arrangement, with similar tax consequences. When receiving Bitcoin for the sale of goods or services, a business may be charged GST on that Bitcoin.
- The buying, selling or using of Bitcoin as a payment are not subject to GST (if not carrying on a business).
To avoid paying tax on any increases in the value of Bitcoin, it should only be purchased to acquire goods or services for private use - This then results in any capital gain or loss being disregarded if the original purchase cost of the Bitcoin was less than $10,000.