All you need to know about Bitcoin
Bitcoin is spreading to every corner of the world and transforming the very essence of monetary transactions.

Bitcoin is a five-year old computer-driven virtual currency traded on peer-to-peer networks. The currency is largely unregulated, nor is it managed by a central bank, instead relying upon an open source cryptographic protocol for the creation, storage and transfer of currency. It is highly volatile, having fluctuated from lows of $US2 to highs above $US1,200. At the time of writing, one Bitcoin was worth around $US590. 

The question is however, is it safe to use Bitcoin in business transactions and what are the tax implications of doing so? A few things to keep in mind are: 

• Bitcoin is a virtual currency and usage is increasing worldwide
• Taxation authorities worldwide, including the Australian Taxation Office, are considering how to treat Bitcoin transactions
• The Tax Office has announced that it will issue specific guidance – including a draft Taxation Determination on whether the forex provisions will apply
• In the absence of any definitive guidance, the best approach is to treat sales, acquisitions and other transactions using Bitcoin in the same way as if those transactions were carried out using cash or other established payment systems, on the basis that it is the existing tax law which will apply to Bitcoin transactions and not new law.

What not many people know is that there is a total of only 21 million Bitcoins that will ever be created. Bitcoins cannot simply be withdrawn as cash in real life. There are three ways to obtain Bitcoins – by mining them, buying them from someone who already has the currency, or providing goods and services and accepting them as payment from someone.

The third way is possible because Bitcoin is becoming an increasingly accepted virtual currency used by businesses around the world – even in Australia. Among local retailers who have adopted Bitcoin are online retailer UndieGuys, the Old Fitzroy Hotel in Sydney's Woolloomooloo and online legal firm LegalVision. On an international level, WikiLeaks and WordPress accept Bitcoin as payment.
  
The factors driving Bitcoin's growth are its appreciating value, decentralised status, how it allows traders to buy and sell various goods in real time, lack of currency conversion costs when buying and selling overseas as well as the absence of transaction costs typically attached to credit cards and rival electronic forms of payment like PayPal.

The unprecedented rise of Bitcoin leads us to the following two questions:

• What is the correct treatment of Bitcoin under the tax law?
• How does this affect how we use it, both now and in planning for the future?

Click here to read our full analysis in July's newsletter.

Regardless of whether it is likely that Bitcoin will eventually replace "real money", Bitcoin's ubiquitous presence in the international currency market looks unlikely to abate anytime soon and the Tax Office's increased scrutiny of Bitcoins indicates that failing to correctly account for Bitcoin transactions could land taxpayers in hot water.

Contact our office on 02 9686 3130 if you are still unsure how Bitcoin is likely to be taxed in Australia and what records you will likely need to keep to substantiate your Bitcoin transactions.

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