Bitcoin has taken the world by storm as the most popular cryptocurrency. Bitcoin is a means of peer-to-peer transacting with no middleman institutions or banks, no transaction fees and no delay in transfer between parties all around the world. This ease and convenience makes it a popular alternative to conventional banking, in spite of its fluctuating and volatile value.
It is useful to explore the treatment of Bitcoin across different jurisdictions in order to understand how it functions and how it will affect transacting in the future.
The treatment of Bitcoin in the United States is somewhat inconsistent and confusing. The United States District Court (Eastern District of Texas) has supported the Security Exchange Commission’s argument to hold that there is ‘no reason to conclude…that Bitcoin is not money’. The Financial Crimes Enforcement Network has agreed with this approach and deemed Bitcoin ‘a medium of exchange that operates like a currency in some environments’, but stated that it ‘does not have all the attributes of real currency…in particular, virtual currency does not have legal tender status in any jurisdiction’.
On the other hand, the Internal Revenue Service issued a notice in 2014 outlining that Bitcoin was to be treated as property for taxation purposes. The inconsistent approach to the classification of Bitcoin in the United States is further complicated by the Commodity Futures Trading Commission (‘CFTC’) announcing in September 2015 that Bitcoin is classified as a commodity, therefore subjecting Bitcoin to compliance with the Commodity Exchange Act and associated regulations. This is an important ruling as trading of Bitcoin is now subject to the CFTC’s regulations and the body also has the power to take action against misleading or fraudulent traders.
Ongoing confusion led to a Senate Hearing on 6 February 2018 to determine the approach regulators should take towards the treatment of Bitcoin and other cryptocurrencies. This was the first of a series of hearings to be held to promote a coordinated approach to treatment of cryptocurrencies by the wide range of organizations with an interest in their regulation. Perianne Boring from the Chamber of Digital Commerce commented that, ‘the SEC and CFTC are working with others to address the patchwork of regulation that suppresses growth and consumer choice, and provide a runway for the U.S. to retain its leadership in technological innovation’.
The state of New York has developed its own solution to the regulation of Bitcoin by implementing a ‘BitLicense’ regime, through which licences are issued by the New York State Department of Financial Services. The regime essentially sets out detailed regulations for cryptocurrency transactions to ensure the maintenance of financial integrity, adequate reporting, and consumer protection. In order to obtain a licence, cryptocurrency exchanges must pay a large application fee and undergo a ‘comprehensive review of [their] anti-money laundering, capitalization, consumer protection and cybersecurity policies’. To date, only three ‘BitLicenses’ have been issued.
Germany treats Bitcoin as a form of ‘private money’. It has been described as working similarly to eBay selling, as recreational users are exempt from paying tax but anyone running a Bitcoin business is required to pay capital gains tax and hold a license. The German Ministry of Finance has held that Bitcoin does not fit the classification of e-money, functional currency, or foreign currency; but nevertheless was clearly a ‘financial instrument’ as the cryptocurrency represents ‘units of account’.
Bitcoin has been treated cautiously and is only permitted to operate in a limited manner in China. The Ministry of Industry and Information Technology has defined Bitcoin as a ‘virtual commodity’ and warned that it should not be used or circulated as a currency. In September 2017 China announced a blanket ban on initial coin offerings (known as ‘ICOs’, whereby funds are raised through the sale of cryptocurrencies to investors in exchange for legal tender or other cryptocurrencies), prohibiting fundraising, digital token financing and the conversion of Bitcoin to and from fiat currencies altogether. This means that the private use of Bitcoin remains legal, but wider public use is heavily scrutinized due to its perceived threat to China’s financial market stability.
Japan only recently (in April 2017) recognized cryptocurrencies as a method of payment. Although it is not a legally recognized currency, a recent legislative amendment defines digital currency as ‘property of value’ which is usable for payment. Japanese authorities regulate the operation of Bitcoin exchanges by requiring customers to provide proof of identification, their profession, and purpose for trading Bitcoin. This means that Bitcoin has the same legal status as any other currency in Japan.
The Canada Revenue Agency considers that there should be a distinction between the treatment of cryptocurrencies when used for personal or business activities. If Bitcoin trading activities are undertaken for profit, this will be included in the individual’s tax assessment. Transactions on a personal basis, however, are referred to as ‘barter transactions’ and exempt from taxation. This results in Bitcoin receiving similar treatment to trade-in vehicles at a car yard; it is a valuable form of property used as a medium of exchange despite the fact that it is clearly not money.
The United Kingdom has amended its goods and services taxation (“GST”) legislation to exclude digital currencies from taxation as a commodity in order for domestic Bitcoin vendors to be able to operate profitably on a global scale. Bitcoin is taxed like any other good or service based on profits from a sale.
In Australia, the 2017 Budget included a plan to remove the double taxation of digital currencies, therefore ‘allowing digital currencies to be treated just like money for GST purposes’.
Australian authorities have responded to concerns surrounding the potential misuse of Bitcoin (for example, through illegal transacting on the dark web) by specifically referring to ‘digital currency’ in the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017 (Cth) (“ALCFA Bill”) currently before Parliament. This definition acknowledges the value of Bitcoin (and other cryptocurrencies) as a medium of exchange and the fact that it is used as consideration when transacting. However, it is still not treated as currency (like in Japan, for example).
It is debatable whether the legislative definition of ‘money’ for taxation purposes should be broadened to encompass an inclusion of digital currencies similar to the definition in the ALCFA Bill. The Australian Tax Office’s determination that Bitcoin is a ‘supply’ (rather than a ‘financial supply’) means that it is technically classified as a form of property in Australia (not money or currency). The ruling that Bitcoin does not fit the definition of ‘financial supply’ renders it exempt from GST for any personal transactions, but the fact that it is ‘property’ renders it an asset subject to capital gains tax. Furthermore, as Bitcoin is not a means of ‘financial supply’, trading or advice pertaining to Bitcoin trading is not defined as a ‘financial service’, thereby exempting Bitcoin exchanges from the need for a financial services licence. This leaves a regulatory loophole in the treatment of Bitcoin in Australia which needs to be addressed in order to ensure consumers are adequately protected and able to take advantage of the rising popularity of Bitcoin and cryptocurrencies generally.
This comparison of digital currencies and, specifically, Bitcoin across different jurisdictions highlights the inconsistencies in its treatment. Bitcoin is intended to operate as a seamless, cross-jurisdictional means of transacting but its unique nature poses difficulties for regulators seeking to capitalise on its market potential while simultaneously protecting consumers and existing financial markets.
Anja Kantic is a lecturer at the University of South Australia School of Law.