[LINK] Bitcoin .. ATO's draft guidance

[Frank O'Connor]

I sort of expected this - even though I haven't been involved in any way for many many years.

The bottom line is that no government will willingly assist other currencies to flourish in competition to their own, especially currencies that operate outside government control altogether. This is for a number of sound economic and other reasons ... but includes the facts that:

1. The competing currency can be used to generate currency movements that affect the national economy as a whole. Think of the movement to the unrestrictedly available US dollar in the Argentinian economy over the last 20 years as an example of this. Argentina has one of the largest dollar reserves of any country (but in multiple hands that it cannot possibly control, or even detect), whilst the peso drops through the floor through lack of support. The central banks pretty much control the amounts in circulation, interest rates, bond rates and other variables which largely 'control' the national currency ... but this would not be possible with a competing uncontrolled currency.

2. Trafficking in the competing currency is extremely useful for criminal, black economy, tax evading and other fraternities that need/want to avoid detection to make their bucks, and/or store value away from prying eyes.

3. Unrestricted untrackable digital transfers ... without intervening trusted sources keeping open records of same (like central banks, banks, financial institutions and the like) also facilitate the above activities.

4. The current middlemen ... banks and financial institutions ...  don't like competition, have extremely deep pockets and powerful voices - and historically (if the last 2000 odd years is any guide) will fight ruthlessly to maintain their turf. I mean, you've all seen how the recent FOFA kerfuffle worked out ... in which the government rolled over to the banks, and Mathias Cormann undoubtedly got his belly rubbed as they caved to the financial industry and the banks over consumer protection (or the lack of it that the banks wanted to see continued).

5. At this stage, I think Bitcoin and its competitors have a long way to go before they can prove that they are seriously adding value to the current financial infrastructure. I look at them basically as a currency stockmarket or bookmaker who deals in money movements. Like the more conventional world finance industry they book up thousands of transactions to add value. In contemporary conventional banking, currency and other financial instrument speculation turns over more than 500 times the volume of transactions necessary for the annual entirety world trade ... and make their money - or lose it - on the movements of fractions of cent in currency values, or the billions of transaction charges and fees that are levied during trading, or the tax losses they can generate by such transactions, or ... well, you get the idea. There's already a market doing what Bitcoin does, but it's doing it more predictably and with more centralised controls.

6. For security, ease of use, universality and utility the current currency regime takes a lot of beating. Think about the enormous number of relatively convenient and secure ways you can pay for anything anywhere. Cash. Credit. Debit card. Cheque. Money Order. Direct Transfer. etc. etc.  The banks may be pooing in their own pond a bit, especially when they add their plethora of fees, charges and sundries to the mix ... but unless they totally cruel their market, there's not a lot of room for newcomers to move. 

To me, Bitcoin - and its competitors - are in many ways a solution in search of a problem.

On the article in particular ...

On 21 Aug 2014, at 10:32 pm, Stephen Loosley <stephenloosley at outlook.com> wrote:

> 
> 
> 
> ATO set to apply GST and capital gains tax to Bitcoin
> 
> By Brian Karlovsky on 21 August, 2014
> http://www.arnnet.com.au/article/552924
> 
> The Australian Tax Office is set to apply GST and capital gains tax to bitcoin in its first move to tax the digital currency.
> 
> The ATO does not deem bitcoin as a currency but has confirmed that bitcoin is a legitimate asset for CGT purposes, according to the ATO's long awaited guidance on bitcoin.

Which means that as its value appreciates (or depreciates for a capital loss) a capital gains liability to be incurred. Presumably the liability for CGT would be triggered by an 'event', such as using the Bitcoin to pay for goods or services, or transferring it to others for payment of a debt, receiving it (in payment) or otherwise disposing of it.

This puts an overhead on Bitcoin transactions that doesn't occur with 'real currency' (and I use the term advisedly) transactions. CGT, plus income tax on the profit of the sale converted back into real moolah ... rather than just a simple income tax debt is probably going to be more expensive. However, any capital loss on the Bitcoin trigger event would be applicable/deductible against any profit you made ... but the transaction is starting to get fiendishly complex for tax purposes.

Of course, there are transaction size limits that apply to CGT ... so lets accept the $10,000 figure mentioned below. Things accumulate from a business perspective, and it would be very easy for a business to suddenly find itself in CGT territory

> 
> "Transacting with bitcoins is akin to a barter arrangement, with similar tax consequences," the guidance statement said. "The ATO’s view is that bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax [CGT] purposes."
> 
> This mean GST could apply to both the goods and services being supplied, and to the ‘supply’ of bitcoins as payment.
> 
> Australian Digital Currency Commerce Association chairman, Ronald Tucker, said it was the beginning, rather than the end of discussions on this issue and that ADCCA looked forward to a continuing dialogue with the ATO on how to create a taxation regime that ensured the emerging digital currency industry could thrive and prosper in Australia. “On the positive front the ATO has confirmed that bitcoin is a legitimate asset for CGT purposes, and is not some digital fancy," he said.
> 
> "This also means that consumers can confidently purchase goods or services with bitcoins for personal consumption, with no adverse tax implications up to the value of $10,000."

Well, yeah ... but, it also limits Bitcoin to being a minor player in the currency stakes. Low limits like this for transaction sizes pretty much rule out any chance of Bitcoin becoming a business currency of choice. Factor in that businesses would be likely to accumulate Bitcoins and exceed the $10,000 limit in trigger transactions (with banks, or whoever they are going to exchange with for real currency) ... then CGT rears its ugly head. Anyone who trades in shares or real estate or whatever can relate to the pain of the record keeping, figuring and paper completion involved ... for the accountant, the government, the statistics reports, the Tax Office. It can be a serious pain.

And none of that happens with 'normal' financial products.

> 
> He said any goods or services sold in Australia would of course, as expected, still attract GST just like a transaction conducted in Australian dollars.
> 
> "The use of bitcoin to pay for goods or services is no different than Australian dollars in this respect, other than of course the convenience provided by digital currency," he said. “The ATO’s paper has, unfortunately, taken the position to treat the supply of Bitcoins the same way as an exchange of a commodity; something that would involve the costly and impractical imposition of GST on the supply of bitcoins."
> 
> Tucker said bitcoin by its very nature is used as a currency and a store of value and we believe it should be treated by the ATO in the same way as other financial inputs such as foreign exchange. “It is notable that other jurisdictions with similar tax systems to Australia, such as the UK, have rejected the view taken by the ATO’s guidance paper, with the purchase of bitcoins not attracting UK VAT.

Of course he does ... but what incentive is there for the government to want to treat it as a currency? For many reasons, including those mentioned above, governments do not see an essentially uncontrolled currency ans asociated currency market as a good thing. And he makes light of what the UK Internal revenue Service has said with respect to Bitcoin ... indeed what the whole OECD has said. They are yet to issue definitive papers the tax and revenue treatment of digital currencies in the specifics ... but they are leaning toward the ATO discussion paper. (A fact which I can assure you would have been central to the deliberations of the Tax Office before they released the paper.)
> 
> He said the digital currency industry in Australia was a hotbed of innovation and entrepreneurship and had the potential to make the country a regional, if not global leader in financial services.
> “This potential, however, could easily be undermined by an uncompetitive and unworkable tax regime that sends the industry offshore to other countries such as Singapore and Hong Kong, where of course Australian GST does not apply.
> 

But potential for what? What will it do that conventional currency and financial products will not do - other than provide a certain degree of anonymity and privacy to transactions that more channelled, controlled, and centralised currencies don't. Sure its not as geographically bound ... but where's the advantage in that (unless you live in an Argentina where the value of your native currency is dropping on a daily basis)? 

What I want from my currency is that it be pervasive, predictable, issued by those I trust to maintain its value, convenient, easy to use in any context, and storeable in a secure and State guaranteed form where I can easily get at it. I don't want to go to my digital wallet one day, and find out that someone ... and nobody knows who ... has trashed the local Exchange where my currency balance validators were stored and reduced my wealth to zilch. At the moment I play with Bitcoin ... and store maybe a $US1000 (which seems to go up and down with monotonous regularity) on an ongoing basis with it - but there is no way in hell I would trust it to keep anything more than that.

As I said, Bitcoin and its competitors are currently a solution in search of a problem ... as they have been for the last 15-20 years.

And no central bank, or even the major trading banks, will allow themselves to be put in a position whereby this new competitor is given an even break and become a currency contender - unless there are bucks in it for them. Merchant banks (even the big New York ones) may trade and mess with Bitcoin - especially if they can figure an angle - but I can't see anyone else doing it.

And no government in their right mind is going to accord them the status of a legal 'currency'. That power they will always prefer to keep to themselves.