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The Money of the people is Bitcoin but Bitcoin is not Money

Anyone who has had the opportunity to get into the Bitcoin and Cryptocurrency ecosystem knows the power this brings world as a new payment rail to escrow value across time and space. Especially when you are on the Bitcoin Lightning Network or on various Layer 2 solutions in Ethereum you can send these payments anywhere in the world instantly and almost for free. 

These cryptocurrencies are fungible, transferable, portable, divisible, uniform, and can be a medium of exchange within the system. So, this begs the question:

“Are cryptocurrencies such as Bitcoin, Ethereum and even forms of stable coins considered actual currency?”

What does the Australian Taxation Office (ATO) think of cryptocurrencies?

Whilst the name in crypto has ‘currency’ in it, there is often confusion with respect to whether crypto used to pay for goods and services is considered money. This is addressed by the ATO in Tax Determination TD 2014/25 ‘is bitcoin a foreign currency’?

Under the tax regulations in Australia, foreign currency is defined as ‘currency that is other than Australian Currency’. Currency then takes it ordinary meaning within the dictionary which is broadly defined and includes ‘money’. 

The courts overtime has then defined money as: 

 Money is any generally accepted medium of exchange for goods and services and for the payment of debts (see Butterworth's Australian Legal Dictionary at 759). Currency and legal tender are examples of money. However, a thing can be money and can operate as a generally accepted medium and means of exchange, without being legal tender. Therefore, bank notes have historically been treated as money, notwithstanding that they were not legal tender.

 It is common consent and conduct that gives a thing the character of money (see Miller v. Race (1758) 1 Burrow 452 at 457). Money is that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities (see Moss v. Hancock [1899] 2 QB 111 at 116).

You might read this and discern that cryptocurrency could be money because it is a medium of exchange, unit of account and a store of value. Even the adoption is widespread with more and more merchants accepting crypto for payment.

However, the ATO’s position on this is that it is not considered widely held enough to constitute money in this regard, at least under set precedent and the courts. 

If we refer to legislature, the ATO considers that currency ‘other than currency in Australia’ must be legally recognised and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for all transactions and payments in that country. 

Ultimately, the ATO’s position is that as crypto is not a monetary unit recognised and adopted by the laws of any other sovereign state as the means for discharging monetary obligations for all transactions and payments in a sovereign state, it is not foreign currency (money).

This was ultimately confirmed in a recent case of Seribu Pty Ltd and the Commissioner of Taxation (Taxation) [2020] AATA 1840 (Seribu), where the taxpayer sought to deduct the loss derived from crypto taxations under the foreign currency gains and losses provision of the Tax Act. 

Ultimately Deputy President McCabe of the Administrative Appeals Tribunal ruled the reference to ‘Australia Currency’ was to the unit of exchange established in the Currency Act and that ‘Other Currency’ is to be issued or recognised by a sovereign state

This case was fascinating because it actually forced a rule change in the Tax Act itself to exclude ‘digital assets’ (defined within the GST Act) to be excluded from being a foreign currency under the definition in Section 995-1; especially with El Salvador adopting Bitcoin as legal tender in September 2021. 

Interestingly quirks of money in our current tax law?!

Because our laws were not written with the contemplation of the existence of cryptocurrencies, there are some interesting quirks within the law. Some examples of this include:  

Borrowing & Lending

When you are borrowing from a bank to buy a house, the borrowing is in currency or in what is legally defined as money. However, if you lend or borrow something that is not money, then are you actually performing this act or is it something else?

Take for example lending and borrowing for superannuation purposes: 

 Section 65 (1) (a) of the Superannuation Industry Supervision (SIS) Act 1993 states that: 

 “A trustee of an investment manager of a regulated superannuation fund must not lend money of the fund to a member of the fund, or a relative of the fund” 

However, as established above the ATO’s views are

“the current levels of use and acceptance of Bitcoin within the community is far short of what may be regarded as sufficient or necessary to satisfy the test in Moss, nor is it a generally accepted medium of exchange per ‘Travelex’. Accordingly, Bitcoin does not satisfy the ordinary meaning of money” (Para. 24 of TD 2014/25)” 

So, at a technical level, if a superfund lends crypto or other digital assets to another entity, it is actually not lending money because crypto is not legally recognised as money.

This is not to say that you should do this because Section 65 is quite broad as to ensure ‘financial assistance’ is captured within the in-house asset rules. But it is a nuance!

 Foreign currency gains and loss

Another example is in relation to the Division 775 of the Tax Act which seeks to tax the gains and losses of foreign currencies which would otherwise fall short of taxation in Australia.

Prior to the introduction of these rules, if an individual says borrowed $100 US dollars today where it was worth $130 AUD and then paid this loan back two months later where the US dollar strengthen to $140 AUD, there was no mechanism to actually capture the FX gain of $10 AUD. However, from 2003 onwards, these movements are now captured within the realms what are known as forex realisable events as follows:

  • Disposal of foreign currency
  • Ceasing to have the right to foreign currency
  • Ceasing to have an obligation to receive foreign currency
  • Ceasing to have an obligation to pay foreign currency
  • Ceasing to have a right to pay foreign currency

However, because the Tax Act does not recognise crypto assets as a currency, then any gain/losses for crypto that is used as currency and transacted basically escape the Australian tax net.

Watch this space

As with government regulations, it always seems to be a game of cat and mouse and at times, it really does struggle to keep pace with groundbreaking and innovative crypto industry.

As more widespread adoption occurs with yet another country (Central African Republic) adopting Bitcoin as legal tender, it would be interesting to see if Australia will change its views to capture the loss tax revenue base from these transactions or to align to other financial models (especially as decentralised finance becomes more prominent).

Need to gain clarity for your complication crypto tax affairs? No worries, please reach out today to secure your private binding ruling service today on (07) 3569 3703.

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