Bitcoin Regulation: Governments Strive to Keep Citizens from Dodging Taxes

bitcoin taxation

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LONDON (InsideBitcoins) — Last month, the Australian Government’s tax office released long-awaited guidelines on the tax status of bitcoin and came to the conclusion that bitcoin is not money, it’s property, and as was highlighted in a recent article in The Conversation, such a distinction has significant implications for the future of bitcoin.

Inside Bitcoins spoke to the co-author of the article, Miranda Stewart, professor and director of the Tax Transfer Policy Institute at the Australian National University in Canberra, and asked her to share her thoughts on the recent ruling.

“It’s a consistent position conceptually for their position with income tax so they are taking an approach, saying ‘we think it’s property’ that is ‘we think it is not money or currency’ and they are applying that approach across all the different tax regimes that they administer federally,” Stewart said.

Bitcoin is property, not money

With the Australian federal government responsible for the administration of general sales tax (usually referred to as VAT in Europe,) and income tax, a consistent approach makes sense — though the ruling remains confusing to those outside of the highly specialised world of tax law.

“It is difficult; it’s not a straightforward question,” Professor Stewart agreed. “But I do understand why they are taking it; it is probably legally correct at this stage to say that bitcoin is not money as a matter of law and if you take that view then you have to think, ‘Well, how do these various tax acts apply?’ The definition of property is quite broad.”

And the matter is further complicated by the somewhat idiosyncratic nature of Australian tax law which includes the fringe benefit tax, something unique to the country.

“It’s a tax on any property or goods given to an employee; what we would call fringe benefits,” Professor Stewart explained.

“If you are given cars, accommodation, free child care and so on, its part of the remuneration. Most countries would just treat it as part of the wages but here it’s a separate flat rate tax charged at the top marginal rate of 48%, which is quite high. It’s intended to be a deterrent to stop employers getting round tax by paying other kinds of benefits,” she added.

A neutral tax for businesses

For those getting paid in bitcoins — even in part — ‘quite high’ might be something of an understatement when it comes time to submit their tax returns, but again, it’s consistent with the idea of bitcoin as property. Being given bitcoin in Australia is like being given a car, a computer or anything else you can think of, aside from money that is. Not that bitcoin is necessarily going to be subjected to stringent tax levels in Australia.

“Business to business it should be a neutral tax,” Professor Stewart pointed out.  “If you’re a business and you’re selling bitcoin to other businesses then you’ll get an input credit on that so you won’t be paying more tax. But it’s far more cumbersome to use this way.”

An unnecessary administrative layer

The lack of finesse that is to be applied to bitcoin transactions in Australia is for Professor Stewart the real downside to the ruling.

“If you obtain bitcoin at different times, which is likely, what our tax law states is that you have to track the value of the bitcoin at any given time. When you come to dispose of it, you have to explain which wallet or group you are disposing of because you need to know what the cost or value of it was. Remember it is property, not money, so the value of it when you bought it is more important that the value it was when you sold it.”

All of which amounts to an administrative layer that is, according to Professor Stewart, ”unnecessary.”

“This is a disincentive relative to using cash for buying and selling goods, that’s what is interesting about the UK; ( the London financial markets are very keen to show that they can maintain this natural edge and if that involves supporting or retracting deals in innovative currency, they have taken the view with VAT that they would like to encourage bitcoin transaction whereas I think other countries are trying to apply the existing tax laws. And that is the question, there is a policy decision to be made, do you want to encourage bitcoin transactions or not? The UK’s answer to date has been a firm yes; other governments are not so sure.”

For Professor Stewart, the reasons for this are all too clear.

“Governments are worried that bitcoin can be used to avoid tax. They are concerned about that and so they have taken a view that is plausible along the law as it is and would ensure that they would collect tax. Now it’s likely to have the effect that it will make bitcoin use more cumbersome… And perhaps special treatment should be given to it for VAT. It’s perfectly possible to legislate for specific taxes, but I think they just don’t know how to deal with it, so they are jumping on it from a regulatory, security approach.”

Ian Jackson is an Inside Bitcoins correspondent based in the U.K.

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