Taxing Bitcoin — GST implications of Bitcoin as money

18 min readOct 30, 2018

1.1 Overview of the Australian GST system

GST is a broad-based consumption tax, and is imposed on taxable supplies and taxable importations.

It is generally the entity making the taxable supply or taxable importation that will be liable for GST. Under section 9–5 of the GST Act, an entity will be regarded as making a taxable supply where:

(a) it makes a supply for consideration (being either monetary and/or non-monetary consideration);

(b) the supply is made in the course or furtherance of an enterprise that it carries on;

(d) it is registered, or required to be registered for GST purposes.

But, the supply will not be a taxable supply to the extent that it is GST-free or input taxed.

In some circumstances the GST included in the price paid for an acquisition of a taxable supply may also be recoverable by an entity as input tax credit.

The GST implications associated with mining and using Bitcoin are discussed further below. GST rules applicable to specific entity types are not discussed. For the purposes of this discussion, and unless specified otherwise, it is also assumed that the relevant entities are in Australia.

1.2 Mining Bitcoin

As previously said, Bitcoins are created and entered into circulation through a process called “mining” that certain users of the Bitcoin network perform (i.e. miners). The process of mining involves miners using the Bitcoin software to solve complex equations. In short, the equations in the mining process serve to verify the validity of Bitcoin transactions. In addition, currently 12.5 new bitcoins are created and awarded to the successful miner who solves the relevant equations.

(a) Carrying on an enterprise

In determining the GST implications associated with mining, it is necessary to firstly consider whether the activities related to mining Bitcoin constitute the carrying on of an enterprise by the miner.

In this context, the term “enterprise” is relevantly defined in section 9–20 of the GST Act as:

an activity, or a series of activities done:
(a) in the form of a *business; or
(b) in the form of an adventure or concern in the nature of trade; […]

It is clear from this definition that “enterprise” includes a business, and the use of the phrase “in the form of” indicates a wider meaning than the word “business” on its own. The term “business” is defined in section 195–1 of the GST Act as including:

any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

While this definition simply states what activities may be included in a business, it does not provide any guidance for determining what the nature, extent, and manner of undertaking those activities amount to for the carrying on of a business. It is therefore necessary to turn to case law.

The indicators that have been held by the courts as relevant are set out in paragraph 13 of TR 97/11 and reproduced below:

whether the activity has a significant commercial purpose or character;
whether the taxpayer has more than one intention to engage in business;
whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
whether there is a repetition and regularity of the activity;
whether the activity is of the same kind, and carried on in a similar manner to that of the ordinary trade in that line of business;
whether the activity is planned, organised, and carried on in a business-like manner such that it is directed at making a profit;
the size, scale, and permanency of the activity; and
whether the activity is better described as a hobby, a form of recreation, or a sporting activity.

While each case turns on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators. No one indicator is decisive.[1] That is, the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the “large or general impression gained”[2] from looking at all of the indicators, and whether these factors provide the operations with a “commercial flavour”.[3] But, the weighting to be given to each indicator may vary from case to case.

It is conceivable that the activities related to mining Bitcoins may be undertaken in the form of a business. For example, the miner may have invested a significant amount of money in computer hardware and advanced scientific computing software to enhance their mining capabilities — this is more likely than not to be the case, given that solving the equations require intensive computing power. Furthermore, the mining activities may be of considerable size and scale, and conducted routinely and systematically, and with a high degree of sophistication. Further, it is likely that the intention of the miner may be to sell the bitcoins generated from the mining process at a profit. In such a case it is likely that the activities undertaken by the miner constitute the carrying on of an enterprise for GST purposes.

Where a miner is carrying on an enterprise, the next issue to consider is whether it is required to be registered for GST purposes. Generally, an entity will be required to be registered for GST purposes, if its annual turnover for the previous 12-month period or projected annual turnover for the next 12-month period in relation to supplies that are connected with Australia exceeds AUD $75,000[4].

Even if a miner is not required to be registered for GST purposes, it may elect to register for GST purposes[5] (e.g. so that the miner can claim any available input tax credits for creditable acquisitions that it makes).

(b) Making a supply for GST purposes

To fall within the ambit of the GST system, there must be a supply (or importation). The importance of supply was highlighted by the Full Federal Court in Sterling Guardian Pty Ltd v Commissioner of Taxation[6], i.e.:

In economic terms it may be correct to call the GST a consumption tax, because the effective burden falls on the ultimate consumer. But as a matter of legal analysis what is taxed, that is to say what generates the tax liability (and the obligations of recording and reporting), is not consumption by a particular form of transaction, namely supply; see generally HP Mercantile Pty Ltd v Commissioner of Taxation (2005) 143 FCR 553 at [10]-[15].

The term “supply” is broadly defined in section 9–10(1) of the GST Act as “any form of supply whatsoever”. While section 9–10(2) goes on to list the things that are included as supplies (such as the supply of goods and services), it is not intended to be an exhaustive list, or limit the scope of the definition of “supply” in section 9–10(1).

Given the broad definition of “supply”, it may be argued that the miners are making a supply of services by undertaking complex equations on their computers in an attempt to validate transactions. Furthermore, where a miner solves an equation, and thus validates the relevant transaction, the 12.5 new bitcoins awarded to the miner may arguably be treated for GST purposes as consideration for the supply of those services.

But, the Commissioner of Taxation (Commissioner) provides as one of his propositions in GSTR 2006/9 that, for every supply, there must generally be a recipient and an acquisition (Proposition 2 in GSTR 2006/9). Relevantly at paragraphs 53 to 55 of GSTR 2006/9, the Commissioner states that:

The meaning of ‘acquisition’ in section 11–10 is the corollary of the meaning of supply in section 9–10 […].
To make an acquisition you have to be the ‘recipient’ of the supply of the thing you are acquiring […]
The supplier and the recipient have to be different entities because an entity cannot make a supply to itself. Also, the recipient has to be identified, as you cannot make a supply to the world at large […].

As with the definition of “supply”, the term “acquisition” is broadly defined in section 11–10(1) of the GST Act as “any form of acquisition whatsoever”. Section 11–10(2) refers to the thing acquired, such as goods, services, or a right, and the means by which the thing is acquired, such as its receipt or acceptance.

To make an acquisition, you have to be the recipient of the supply of the thing you are acquiring. In terms of a supply, the “recipient” is defined in section 195–1 of the GST Act as “the entity to which the supply was made.” This definition suggests that there must be a supplier and a recipient, and that something is to pass from the supplier to the recipient. While there are exceptions to this proposition, as set out in paragraphs 60 and 61 of GSTR 2006/9, they are not relevant to this analysis.

In terms of mining, it appears that there is an entity making a supply (being the miners), but there are no identifiable recipients of that supply. The miners merely undertake complex equations on their computers in an attempt to validate transactions undertaken by other users of the Bitcoin network. The miners do not have access to any details as to the nature of the transaction or the identities of the parties involved in that transaction.

As there are no identifiable recipients of the supply made by the miners, there is at best a supply to “the world at large.” As such, in accordance with the Commissioner’s views in GSTR 2006/9, the process of mining does not constitute a “supply” by the miners for GST purposes. Similarly, there is no acquisition (or acquisitions) of a “mining” supply by the users undertaking the transaction which has been validated by the miner.

For this reason, it is submitted that mining activities alone would not give rise to taxable supplies by the miners.

(c) Claiming input tax credits

An entity is entitled to claim an input tax credit for the creditable acquisitions it makes.[7] An acquisition is not a creditable acquisition, if it is not for a creditable purpose — e.g. if the acquisition relates to the making of a supply that is input taxed.[8]

As such, the ability for a miner to claim input tax credits will depend upon the GST treatment of its supplies and other activities — e.g. if the miner is properly treated as selling Bitcoin as input taxed financial supplies — this is considered further below.

If a miner carrying on an enterprise does not make any input taxed supplies, then provided that it is registered (or required to be registered) for GST, the miner would be entitled to claim input tax credits for its inputs (e.g. computer equipment acquired as taxable supplies).

1.3 Holding Bitcoin

The holding of bitcoins alone would not involve the user holding the bitcoins making any supplies for GST purposes. As such, no GST consequences would arise from merely holding bitcoins.

1.4 Using Bitcoin

(a) Bitcoin as money

Before considering the GST implications of using Bitcoin, it is first necessary to revisit the issue as to whether Bitcoin is “money”. As discussed in the previous post, it is submitted that Bitcoin falls within the ordinary meaning of “money”.

What is less clear is if Bitcoin is “currency”. But, the acceptance by the German government of Bitcoin as a unit of account, and the postulate before the Swiss Parliament asking that Bitcoin be treated as a foreign currency suggest that Bitcoin may be “currency”. If not now, it seems inevitable that Bitcoin will be formally accepted as currency by a government in the near future.

As “money” within the ordinary meaning of the term, Bitcoin would clearly be “money” within the meaning of the modified definition in section 195–1 of the GST Act, as that definition merely serves to expand upon the ordinary meaning (refer to discussion in the previous post).

It should, in particular, be noted that Bitcoin would seem to fall directly within paragraphs of the GST definition of money. In particular:

“currency” at paragraph (a) of the definition (for the reasons discussed); and/or
“whatever is supplied as payment by way of […] credit or debiting an account”, paragraph (e)(ii) of the definition.

In respect of the latter, it is noted that Bitcoin is essentially an account-based system by which payment is made between users. That is, as discussed, the transfer of bitcoins represents a transfer or reallocation of value, which is recorded in the public ledger on the Bitcoin network. Dr Rhys Bollen makes the following observation:[9]

Bitcoin appears to be a decentralized account-based payment system without an issuer or central counterparty…
However, Bitcoin is still an account-based payment system. Coins themselves are not stored on a user’s device. While the register is kept by multiple collaborating nodes, the block chain keeps a full record of transactions and by a process of deduction a balance for each user. This is effectively the transaction history and account record for the parties. All transactions are recorded on and confirmed by the block chain system. Transactions can only occur and be confirmed via the central transaction record. No offline transactions are possible. Therefore, in the author’s view, the Bitcoin system is an account-based payment system, albeit with decentralised account-keeping by a cloud of autonomous but cooperating account record-keepers.

(b) Carrying on an enterprise

There is also another threshold issue to address — that is, whether users that accept Bitcoin as payment or who trade in Bitcoin are carrying on an enterprise for GST purposes. The factors and principles relevant to this issue are discussed above, and would have equal application.

There is likely to be little difficulty in determining whether or not a user accepting Bitcoin as payment is carrying on an enterprise.

If a user trading in Bitcoin is also a miner, then there may well be an enterprise of “mining and trading” Bitcoin — e.g. where the mining and trading operations are of considerable size and scale, and conducted routinely and systematically in a business-like manner.

The same analysis would apply to a user that trades but does not mine Bitcoin.

If a user of Bitcoin does not carry on an enterprise, then GST consequences would not follow for such a user.

For the purposes of the discussion below, it is assumed that users using Bitcoin are carrying on an enterprise for GST purposes, and are registered or required to be registered for GST.

(c) Using Bitcoin as payment for goods and services

On the basis that Bitcoin falls within the definition of “money” for GST purposes, the GST consequences of using Bitcoin as payment for goods and services (or other things) are relatively straightforward, and would be no different from the use of Australian currency as payment for goods, services, and other things.

Recipient of a supply

Firstly, it should be noted that a supply for GST purposes does not include a supply of money, unless the money is provided as consideration for a supply that is a supply of money.[10] This means that there will be no GST liability for the entity using Bitcoins to purchase goods, services, or other things (i.e. the recipient) as it will not be making a supply for GST purposes.

Of course, whether or not the recipient would be entitled to claim an input tax credit for its acquisition from the supplier would depend upon the particular circumstances of the recipient, and also whether the acquisition is of a taxable supply (as discussed below).

Supplier

Given the broad definition of “consideration” in section 9–15(1) of the GST Act, it is clear that the payment of bitcoins will be consideration for the supply of goods, services, or other things by the supplier. Whether the supplier will be liable for GST on its supply (i.e. a taxable supply) will depend upon a number of factors:

the nature of the supply (i.e. whether it is goods, services, rights, etc.);
whether the supply is connected with Australia in the relevant sense;
whether the supply is made in the course or furtherance of an enterprise carried on by the supplier; and
whether the supplier is registered or required to be registered for GST purposes.

For example, if an Australian entity supplies advisory services to an individual who is a non-resident, and is not in Australia when the service is supplied, then the supply of those services may be GST-free irrespective of the form in which payment is made by the non-resident.[11]

Depending upon the circumstances, the supply of goods, services, or other things will be taxable, GST-free, or outside the scope of GST. It would be expected that most “brick-and-mortar” businesses in Australia (e.g. a café) accepting Bitcoin as payment would generally make taxable supplies in consideration for bitcoin.

Where the supply is a taxable supply attracting GST, it is likely that the consideration provided for the supply will need to be converted into Australian currency, notwithstanding that Bitcoin is to be treated as “money” for GST purposes. Strictly speaking, the currency conversion is required where the amount of consideration for a supply is expressed in foreign currency.

That is, section 9–85 of the GST Act requires the value of a taxable supply to be expressed in Australian currency.[12] If any amount of consideration for the supply is expressed in a foreign currency, such amount is to be treated as if it were an amount of Australian currency worked out in the manner determined by the Commissioner.[13] The manner of working out the consideration in Australian currency where it has been expressed in a foreign currency is set out in GSTR 2001/2.

The term “foreign currency” is neither defined in the GST Act nor in GSTR 2001/2. It is however defined in section 995–1 of the ITAA 1997 as “a currency other than Australian currency”. As the terms “currency” and “Australian currency” are not defined in the ITAA 1997 or the ITAA 1936, it is necessary to take their ordinary meaning into account when interpreting section 9–85 of the GST Act. Further, in this regard, it should be noted that item 9 of the table in regulation 40–5.09(3) of the GST regulations refers to “the currency of a foreign country”.

The ordinary meaning of “currency” is discussed at 3.1(b) above. Arguably, Bitcoin already meets the definition of “foreign currency”, being simply a “currency” other than Australian currency (i.e. the Australian dollar). However, if “foreign currency” is read as simply being the “currency of a foreign country”, then Bitcoin may not fit the definition as it is yet to be formally recognised as currency under the laws of another country at this stage.

But, as discussed at 2.3(a), with the increasing growth of Bitcoin, countries are currently examining the possibility of formally recognising Bitcoin as currency, such as Switzerland. In Germany the government has declared Bitcoin as a “unit of account”, which is akin to treating Bitcoin as currency. As such, while Bitcoin is not formally recognised as currency under the laws of another country, it seems inevitable that Bitcoin will be recognised by another country and hence clearly as a “foreign currency” (i.e. as a “currency of a foreign country”) in the near future, even if it is not already capable of being treated as such in the present.

In either case, where the consideration for a supply is expressed in bitcoin, it is clear that the requirement in section 9–85(1) is not satisfied.

In order to satisfy this requirement, it is proposed that the amount of consideration for the supply (which is expressed in bitcoin) be converted into Australian currency in a similar manner to that prescribed in GSTR 2001/2 for foreign currency. In this regard, it is noted that the Commissioner allows for the conversion of foreign currency into Australian currency using the following formula:

consideration 1
expressed in a x your particular exchange rate
foreign currency on the conversion day

where:

your particular exchange rate is the rate from the foreign exchange organisation you have chosen to use (such as a commercial bank), the Reserve Bank of Australia rate, or from your agreement, whichever is applicable; and
the conversion day is the date that you use to convert your foreign currency into Australian currency for GST purposes.[14]

While the Reserve Bank of Australia and commercial banks do not publish bitcoin exchange rates, there are a number of bitcoin exchanges and independent third-party foreign-exchange service providers (e.g. OANDA and XE) that have bitcoin exchange rates set against the value of Australian currency. There is no reason why the rates quoted by bitcoin exchanges or foreign-exchange service providers cannot be used to convert bitcoin to Australian currency for GST purposes (whether as a commercial exchange rate or a rate agreed between the transacting parties), and for the principles in GSTR 2001/2 to be adopted in these circumstances.

In most cases, it is likely that a transaction in Bitcoin will already reflect a pre-determined rate against Australian currency (by the supplier or by specific agreement between the parties).

(d) Buying and selling of bitcoin

Bitcoins can be bought and sold between users directly or via a bitcoin exchange.

When bitcoins are traded on a bitcoin exchange that is a market exchange, a buy order is executed partially or in full when the price bid can be matched against a sell order that is at or below the bid amount. A sell order is executed partially or in full when the price asked can be matched against a buy order that is at or above the ask amount. Orders that cannot be matched immediately remain in the order book. The bitcoin exchange will generally charge a trading fee to each successful trade made through the market. The operator of the bitcoin exchange acts as a service provider to both buyers and sellers of bitcoin.

It is understood that users trading on market exchanges are required to open an account with the operator, where bitcoins can be “deposited” from, or “withdrawn” to, the user’s personal Bitcoin wallet. The precise technical process by which these exchange accounts operate is unclear and may differ depending upon the market exchange — e.g. it is unclear whether they involve bitcoins being transferred to the market-exchange operator’s Bitcoin wallet(s) via separate Bitcoin addresses for each user, or whether they involve each user creating Bitcoin wallets via the exchange operator’s website. In either case, as the operator of the bitcoin exchange acts a service provider to both buyers and sellers of bitcoin, it is assumed that the terms of use are such that the extent that exchange accounts involve bitcoin being held in a Bitcoin wallet to which the exchange operator has control, the exchange operator merely holds the bitcoin on the user’s behalf. In this way, transfers of bitcoins via market exchanges would still be treated as though they were trades made directly between users.

In the case of bitcoins traded on a bitcoin exchange that is a fixed-price exchange, transfers of Bitcoin are made directly with the operator of the exchange. In this way, such transactions are still equivalent to direct trades between two individual users.

As previously stated, section 9–10(4) of the GST Act provides that “… a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.” Based on the proposition that bitcoin is money, the trading of bitcoins between users (whether or not via a bitcoin exchange that is a market exchange) will be a supply for GST purposes.

Depending upon the circumstances, the sale of bitcoins may be treated as:

an input taxed supply[15] — if Bitcoin qualifies as a “foreign currency”. There may also be a corresponding acquisition supply of the bitcoins sold, which would also be an input taxed supply by the recipient. This would be consistent with economically equivalent foreign-exchange sales of non-Australian real-world currency within Australia;
a GST-free supply — if the sale of bitcoins is made to a non-resident outside Australia at the time of the supply.[16] GST-free treatment may even arise irrespective of the residency of the transacting parties in circumstances where the Bitcoins are clearly for use outside Australia as a supply made in relation to rights for use outside Australia;[17]
a taxable supply — if Bitcoin does not qualify as a “foreign currency”. This is on the basis that the supply of bitcoin would have to be a taxable supply as it is not specifically treated as input taxed under regulation 40–5.09 of the GST Regulations. In such case, this would be so even though Bitcoin is “money”. If correct, this would clearly give rise to an anomalous result that is inconsistent with the GST treatment of economically equivalent foreign-exchange sales of non-Australian real-world currency within Australia — see also discussion below;
outside the scope of GST — if the sale is not connected with Australia in the relevant sense, e.g. the buyer and seller are both non-residents, an Australian individual selling Bitcoins when travelling outside Australia (i.e. the thing is done outside Australia).

GST-free treatment may be most the applicable in the context of bitcoin exchanges, given that the major bitcoin exchanges are overseas operations, and that Australian residents would be expected to trade with the vast community of non-resident users trading bitcoin on those bitcoin exchanges.

Where the sale of bitcoins is input taxed, it may be that the seller would be restricted in its ability to claim input tax credits for its acquisitions.

(e) Alternative view — Bitcoin is not money

If Bitcoin were not treated as “money” for GST purposes, then the transfer of bitcoin (both by way of sale or as payment) would in all likelihood give rise to separate taxable supplies, in addition to the real-world supplies being made in consideration for Bitcoin.

This would cause anomalous and problematic results:

a user providing bitcoin as payment would themselves have a GST liability on the payment. Where payment of bitcoin is consideration for a taxable supply, this means that both the payer and the payee would be making taxable supplies to each other;
as noted above, an exchange of bitcoin for Australian dollars in Australia would be a taxable supply.

These results are anomalous as they are inconsistent with equivalent transactions where real-world currency is used as the means of payment/medium of exchange instead of bitcoin, in circumstances where the parties to the transaction consider bitcoin as nothing other than a medium of exchange.

Such results give rise to increased complexity for taxpayers, increased compliance costs, and increased risk of non-compliance.

Notes

[1] Evans v FC of T 89 ATC 4540; (1989) 20 ATR 922.

[2] Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551.

[3] Ferguson v FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884.

[4] Sections 23–5 and 23–15 of the GST Act.

[5] Section 23–10 of the GST Act.

[6] At paragraph 15 in Sterling Guardian Pty Ltd v Commissioner of Taxation (2006) 149 FCR 255; 2006 ATC 4227; (2006) 62 ATC 119.

[7] Sections 11–5 and 11–20 of the GST Act.

[8] Section 11–15(2) of the GST Act. This is subject to exceptions in sections 11–15(4) and 11–15(5).

[9] Note 6, above at 283.

[10] section 9–10(4) of the A New Tax System (Goods and Services Tax) Act 1999.

[11] Item 2 in the table in section 38–190(1) of the GST Act,

[12] Section 9–85(1) of the GST Act.

[13] Section 9–85(2) of the GST Act.

[14] Paragraph 19 of GSTR 2001/2.

[15] Item 9 of the table in regulation 40–5.09(3) of the GST Regulations.

[16] Item 2 of the table in section 38–190(1) of the GST Act. See also Item 3.

[17] Item 4 of the table in section 38–190(1) of the GST Act. See also Travelex Ltd v Commissioner of Taxation [2010] HCA 33.