Decoding the Regulatory Enigma: How Australian Regulators Should Respond to the Tax Challenges Presented by Bitcoin

Abstract

Bitcoin and its underlying technology present a range of opportunities, but also a number of significant challenges, especially for regulators. Not least of these challenges surround ensuring bitcoin’s fair and effective taxation. In this respect, bitcoin raises two key questions. First, as bitcoin is a new technology, the taxation of which was not foreseen by the income tax or GST regimes in their present form, determining how these bodies of law should apply to bitcoin is complex and imperfect. Secondly, as bitcoin functions broadly like an electronic, virtual form of cash, ensuring bitcoin users’ compliance, and minimising the risk that the technology is applied to tax evasion, raises a number of administrative and jurisdictional challenges. In a suite of rulings, the ATO took the view that bitcoin is money under the GST and income tax regimes, which causes a number of tax anomalies, particularly in the context of GST. Evidence heard at the Senate Inquiry suggested that the commercial consequences of these anomalies were significant. The regulatory question has received minimal consideration in an Australian context. This paper argues that there is some legal basis to treat bitcoin as money for the purpose of income tax and, in particular, GST. It contends that, although this may not be the best strict legal interpretation, it is arguably consistent with the policy of the provisions, and results in fairer, more ‘equal’ tax outcomes between bitcoin and traditional money. Importantly, international experience suggests that this approach would better foster the development of bitcoin intermediaries, the existence of which is likely to be an essential part of a regulatory platform. In this respect, a more purposive, liberal interpretation of the relevant law to promote short term fairness and equity in the tax regime, may also prove key to bitcoin’s effective long-term regulation.