The Australian Taxation Office's (ATO) decision to treat bitcoin and other cryptocurrencies as a commodity for tax purposes is likely to hamper the emerging digital currency sector and force businesses overseas, a Senate Committee hearing has heard.
"It could result in driving the digital currency businesses that [are] emerging in the sector offshore and potentially underground," said Ronald Tucker, the chairman of the Australian Digital Currency Commerce Association (ADCCA), during the first hearing of an inquiry by the Senate Economics References Committee into an appropriate framework for digital currencies in Australia.
Tucker, who is also CEO of bitcoin exchange Bit Trade Australia, told the committee that the ATO's stance on virtual currencies "did not make sense".
"Fortunately, the ATO is the only area where the domino has fallen that way," he said, adding that Australia is better placed than most markets to take advantage of virtual currencies like bitcoin. As such, is in a position to lead the world on policy relating to the technology.
"Australia already has a world-leading financial services framework," he said. "Our banks punch well above their weight globally. Compared to places like the US, the regulatory measures here are simple to implement. We don't have 53 money regulators [as does the US]; we have just a handful to deal with."
Tucker said that although there may be certain risks in Australia taking a leading stance on digital currency treatment, it is better than the alternative of not taking decisive action early enough.
The hearing comes almost two months after NSW Labor Senator Sam Dastyari, who is also chairman of the Senate Economics References Committee, successfully moved in parliament an inquiry into an appropriate framework for digital currencies in Australia.
In August, the ATO released its guidance on the taxation treatment of bitcoin and other cryptocurrencies, timed to coincide with the lodgement of Australians' 2013-14 income tax returns.
The guidance paper and rulings called for individuals' bitcoin transactions to be treated like barter transactions with similar taxation consequences, unless they are doing it for business purposes, in which case it would be subject to the Goods and Services Tax (GST) — both when bought, and again when sold. This treatment effectively classes bitcoin as a commodity for businesses, rather than a currency.
However, the industry experts called by the committee for the inquiry's first hearing on November 26 are supportive of virtual currencies being treated more like a currency than a commodity.
"I'm concerned about — where we are with bitcoin at the moment — is that by taxing it as a commodity, we are not taxing it in the way it operates, and it's inconsistent with the functional aspects of bitcoin effectively as a means of exchange and a store of value," said Andrew Sommers, partner at Australian commercial law firm Clayton Utz.
"The important thing for Australia to do is to ensure that the design of our tax system, both from an income tax and GST perspective, gives us an appropriate share of the tax base, but also is appropriate for what it is those things are supposed to be taxing," he said.
In response to NSW Liberal Party Senator Bill Heffernan's concerns over bitcoin's threat to sovereignty in relation to Australian taxation, Sommers suggested that virtual currencies — and bitcoin in particular — could be easier to regulate and monitor than traditional money.
"As a regulator, the amount information available to you by the documents on the [bitcoin] blockchain is unprecedented," he said. "It's not merely a passive record, but the way in which transactions interface with the blockchain, it could have an encoded tax characteristic. So, the blockchain could distinguish between tax-free for GST purposes or taxation for GST purposes."
Chris Guzowksi, CEO of bitcoin ATM distributor ABA Technology, who also appeared on the experts' panel, said that the ATO's treatment guidance has caused confusion within the industry.
"My take on the GST ruling is that it has caused a lot of confusion in the industry," he said. "On the one hand, it has created clarity, because they've created some sort of definition of bitcoin and classed it as an intangible asset, but on the other hand, putting GST on it has meant that it puts additional friction on transactions.
"It completely sets it apart from other types of currency, and doesn't make it practical to purchase locally. So, it's sent a lot of businesses offshore, putting a brake on the industry for sure," he said.
The inquiry kicks off as United States Senator Tom Coburn argues that under the country's existing legislation, cryptocurrencies could be deemed illegal, as they are not currencies issued by the Department of Treasury or any other agency of the federal government.
However, he also said in a letter to ZDNet contributor Ken Hess that the country's Internal Revenue Service recently announced its ruling that cryptocurrencies "will be taxed at capital gains rates rather than ordinary tax rates, so there is no longer ambiguity surrounding its tax treatment".
In June, California Governor Jerry Brown signed a Bill repealing Section 107 of the state's Corporation Code, which prohibited companies or individuals from issuing money other than the "lawful money of the United States".
The Bill effectively removed the prohibition of companies or individuals from issuing money other than US dollars, rendering bitcoin technically legal in the state.
The committee is expected to deliver its final report on March 15 next year.