Draft Taxation Determination
Income tax: is Bitcoin a 'foreign currency' for the purposes of Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997)?
||This document has been finalised by TD 2014/25.
||There is a compendium for this document. TD 2014/25EC
||You can access a guidance paper that has been issued with this draft Determination. The guidance paper provides an overview of the tax treatment for transactions associated with crypto-currencies, specifically Bitcoin. Where other crypto-currencies have the same characteristics as Bitcoin, the information in the guidance paper applies equally to the taxation treatment for other crypto-currencies.
This publication provides you with the following level of protection:
This publication is a draft for public comment. It represents the Commissioner's preliminary view about the way in which a relevant taxation provision applies, or would apply to entities generally or to a class of entities in relation to a particular scheme or a class of schemes.
You can rely on this publication (excluding appendixes) to provide you with protection from interest and penalties in the following way. If a statement turns out to be incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the publication in good faith. However, even if you don't have to pay a penalty or interest, you will have to pay the correct amount of tax provided the time limits under the law allow it.
1. No. Bitcoin is not a 'foreign currency' for the purposes of Division 775 of the ITAA 1997.
Date of effect
2. When the final Determination is issued, it is proposed to apply both before and after its date of issue. However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10).
3. While the ATO view will have application for periods prior to its publication, the ATO will not generally apply compliance resources to past year cases in relation to taxpayers who have behaved in a bona fide manner and made a genuine attempt to understand and satisfy their obligations.
Commissioner of Taxation
20 August 2014
Appendix 1 - Explanation
This Appendix is provided as information to help you understand how the Commissioner's preliminary view has been reached. It does not form part of the proposed binding public ruling.
How is 'foreign currency' relevant for tax purposes?
4. Division 775 of the ITAA 1997 provides rules for recognising foreign currency gains and losses for income tax purposes. Under subsection 775-15(4) of the ITAA 1997 to the extent that a foreign currency gain would be included in a taxpayer's assessable income under Division 775 and another provision of the Assessment Acts, the gain is only included in the taxpayer's assessable income under Division 775.
5. Section 995-1 of the ITAA 1997 provides that 'foreign currency means a currency other than Australian currency'. The terms 'currency' and 'Australian currency' are not defined in the Assessment Acts and therefore take their ordinary meaning having regard to their context and the legislative purpose.
6. Determining whether a bitcoin is 'foreign currency' or 'currency' as those terms are used in the income tax law requires consideration of the characteristics of Bitcoin.
What is Bitcoin?
7. The Oxford Dictionary of English (3rd Ed) defines Bitcoin as:
a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank: bitcoin has become a hot commodity among speculators | If you want to buy something using bitcoin you need to make sure the seller accepts the cryptocurrency.
8. It is described by commentators as 'a virtual currency that essentially operates as online cash'1 and as a 'crypto-currency, designed to reinvent the way that money works'.2 Bitcoin operates as a decentralized peer-to-peer payments network whose implementation relies on the use of public-key cryptography to validate transactions involving existing bitcoins and in doing so generates new bitcoin.3 The Bitcoin system is decentralized in that it is not under the control of a central authority.4 Transactions on the Bitcoin network are denominated in bitcoin. The value of Bitcoin is 'not derived from gold or government fiat, but from the value that people assign it'.5
9. The process through which bitcoins are created and enter into circulation is called Bitcoin 'mining'. Mining involves a 'miner' using freely downloadable Bitcoin software to solve complex cryptographic equations that essentially verify and validate transactions involving the transfer of existing bitcoins between other parties, for example, to ensure an existing bitcoin cannot be transferred more than once by the one person. The first 'miner' to successfully solve an equation receives as a reward a specified number of newly created Bitcoins to their Bitcoin address. The process of 'mining' has been explained as follows:6
The actual mining of bitcoins is by a purely mathematical process. A useful analogy is with the search for prime numbers: it used to be fairly easy to find the small ones (Eratothenes in Ancient Greece produced the first algorithm for finding them). But as they were found it got harder to find the larger ones.
For bitcoins the search is not actually for prime numbers but to find a sequence of data (called a 'block') that produces a particular pattern when the Bitcoin 'hash' algorithm is applied to the data. When a match occurs the miner obtains a bounty of bitcoins (and also a fee if that block was used to certify a transaction). The size of the bounty reduces as bitcoins around the world are mined.
The difficulty of the search is also increased so that it becomes computationally more difficult to find a match. These two effects combine to reduce over time the rate at which bitcoins are produced and mimic the production rate of a commodity like gold. At some point new bitcoins will not be produced and the only incentive for miners will be transaction fees.
10. Bitcoins that are already in circulation can be acquired either by exchanging 'national' or 'fiat' currencies7 for them through an online exchange (or through a Bitcoin ATM), or by accepting them as a gift or in exchange for goods and services.
11. Bitcoins are sent and received via Bitcoin addresses. A Bitcoin address is a long alphanumeric string used by the network as an identifier. A Bitcoin address can be generated at no cost by any user of Bitcoin and a person can have any number of Bitcoin addresses.8
12. Bitcoin uses public key cryptography to make and verify digital signatures used in Bitcoin transactions.9 Each user is assigned a 'public/private' keypair which is saved in that person's Bitcoin wallet. A Bitcoin wallet has been described as something 'that stores the digital credentials for [a person's] bitcoin holdings'.10
13. The public key is an alphanumeric number that mathematically corresponds to the Bitcoin address which is publically known. The private key is also an alphanumeric number, however, it is kept secret as it is what allows the bitcoins to be transferred between Bitcoin addresses.11 The private key is also mathematically related to the Bitcoin address. It is designed so that the Bitcoin address can be calculated from that private key, but importantly, the same cannot be done in reverse.12
14. To transfer bitcoins, a person creates a transaction message with the number of bitcoins to be transferred and signs the transaction with their private key.13 Those bitcoins are associated with the person's public key. The transaction is then broadcast to the Bitcoin network for validation through the Bitcoin mining process.14
15. A bitcoin is only accessible by the person in possession of the private key that relates to the Bitcoin address associated with that person's bitcoin holdings. Accordingly, a bitcoin consists not just of the numerical amount (or balance) of bitcoins and the Bitcoin address to which they are associated, but also the related private key that allows the holder to do anything with those bitcoin.
Is Bitcoin 'currency' under the ordinary meaning of the term?
16. The Macquarie Dictionary relevantly defines 'currency' as:
1. that which is current as a medium of exchange; the money in actual use.
5. circulation, as of coin.
17. This definition suggests one of the core features of currency is that it is ultimately related to, and might be viewed as a species of the broader category of, 'money'. The term 'money' is defined in the Macquarie Dictionary as:
1. gold, silver, or other precious metal pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value.
2. current coin.
3. coin or certificate (as banknotes, etc.) generally accepted in payment of debts and current transactions.
4. any article or substance similarly used.
5. a particular form or denomination of currency.
6. a money of account.
7. property considered with reference to its pecuniary value.
8. an amount or sum of money.
9. wealth reckoned in terms of money.
10. (plural) Law pecuniary sums.
11. pecuniary profit.
18. In Leask v. Commonwealth 15 (Leask), in finding that subsection 31(1) of the Financial Transaction Report Act 1988 was a law with respect to 'currency' within the meaning of paragraph 51(xii) of the Constitution, Brennan CJ stated at 5077:
Currency consists of notes or coins of denominations expressed as units of account of a country and is issued under the laws of that country for use as a medium of exchange of wealth.
19. Justice Gummow further explained at 5089-5092:
Section 8(1) of the Currency Act 1965 (Cth) (the Currency Act) states that the monetary unit, or unit of currency, of Australia is the dollar; s 9(1), so far as is material, requires every transaction, dealing, matter or thing relating to money or involving the payment of, or a liability to pay, money to be made, executed, entered into or done according to the currency of Australia, unless the currency of some other country is used; and s 11(1) requires that every payment, unless made according to the currency of some other country, be made according to the currency of Australia.
In Watson v Lee (147), Mason J, with whom Gibbs J agreed, held that s 51(xii) gave the Parliament power 'to control and regulate the receipt and use' in Australia of foreign currency. Barwick CJ and Stephen J (with whom Gibbs J also agreed) spoke to the same effect (168). By parity of reasoning, the power also supports laws to control and regulate the receipt and use of coin and paper money in Australia, being the medium of exchange in Australia.
Stephen J and Mason J also emphasised that, while 'coinage' and 'legal tender' involved quite specific and narrow concepts, the former being concerned with coins as money and the latter with the prescription of that which at any particular time may be a lawful mode of payment, 'currency' was a broader expression. This is exemplified by the provisions of the Currency Act to which I have referred earlier in these reasons. They illustrate the proposition that currency is a universal means of exchange, designated by a particular unit of account (169). (footnotes omitted)
20. The meaning of 'money' was considered in Travelex Limited v. Commissioner of Taxation 16 (Travelex) in the context of the A New Tax System (Goods and Services Tax) Act 1999. The issue in question was whether the taxpayer was entitled to a declaration that a foreign currency exchange transaction was a supply made in relation to rights and, if so, whether the rights were for use outside Australia, such that it was a GST-free supply. In considering when money may be considered to be 'goods' Emmett J stated:
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  2 QB 111 at 116).
21. In Messenger Press Proprietary Ltd v. FC of T 17, Perram J referred to the test in Moss v. Hancock 18 (Moss) as adopted by Emmett J in Travelex and applied it to promissory notes denominated in a foreign currency paid in exchange for release of a book debt denominated in Australian currency. In concluding that the promissory notes were not 'money' per the Moss formulation, Perram J noted that:19
There was no evidence that the promissory notes had taken on the quality of being able to be used throughout the community for the discharge of debts and, if they did have that quality, any reasonable person would certainly make inquiries as to the 'character or credit' of the issuer before accepting such a note.
22. It is also noted that in respect of the formulation of the test in Moss, Perram J noted that 'no doubt this definition has its limitations'20 referring to the fact that the Moss formulation did not include the exchange settlement funds held by banks with a central bank as such funds are not available to the community at all, passing only between banks despite the fact that they constitute the monetary base of the payments system. Noting some other deficiencies in the definition, Perram J referred to Mann on the Legal Aspects of Money. 21
23. In that text, Proctor suggests that the formulation in Moss had tended to adopt a purely functional approach to the definition of money.22 It is further suggested that although a legal definition of money should reflect at least some of these functional attributes, it must also include an element which recognises the international law requirement that money 'must exist within some form of legal framework, because it reflects an exercise of sovereignty by the State in question'.23 Proctor then goes on to state:
For anything which is treated as 'money' purely in consequence of local custom or the consent of the parties does not represent or reflect an exercise of monetary sovereignty by the State concerned, and thus cannot be considered as 'money' in a legal sense.24
24. It has been argued that Bitcoin satisfies the ordinary meaning of money because on a functional approach it satisfies three essential elements for money because it serves as (1) a medium of exchange, (2) a unit of account, and (3) a store of value. In addition, it is argued that there is widespread usage and acceptance of Bitcoin in the community as a means of discharging debts and making other payments, and accordingly Bitcoin's increasing acceptance has now reached the point that it qualifies as 'money'. This later point is very much a question of fact and degree. The Commissioner's view is that the current use and acceptance of Bitcoin in the community is not sufficiently widespread such that is satisfies the test in Moss, nor is it a generally accepted medium of exchange as per Travelex. 25 Accordingly, Bitcoin does not satisfy the ordinary meaning of money.
25. Ultimately, it is not critical to come to a conclusion on whether Bitcoin is covered by the ordinary meanings of currency and money because within the context of section 995-1 of the ITAA 1997, the statute is considered to have provided its own particular conception of currency.
Is Bitcoin 'currency' taking into account the legislative context and purpose?
26. The Commissioner considers that Bitcoin does not constitute 'currency' nor 'foreign currency' in the context in which those terms operate for the purposes of Australian tax law.
27. The legislative context in which the term 'currency' is used is to define 'foreign currency' as something 'other than Australian currency'. Accordingly, Parliament chose to define 'foreign currency' as the antithesis of 'Australian currency'. Therefore it is necessary to consider what the ITAA 1997 means by 'Australian currency' in order to determine in what sense the term 'currency' is being used within the definition of foreign currency.
28. Although the term 'Australian currency' is undefined in the Assessment Acts, it has a legal meaning under Australian law by virtue of the Currency Act as explained above in Leask. It is a general principle of statutory interpretation that, where a statute uses words that have acquired a legal meaning, 'it will be taken, prima facie, that the legislature has intended to use them with that meaning unless a contrary intention clearly appears from the context'.26
29. In Gamer's Motors Centre (Newcastle) Pty Ltd v Natwest Wholesaler Pty Ltd 27 Priestley JA further elaborated:28
The object of the approach is not to find the legal as opposed to the 'ordinary' meaning, but to find from the range of legal and ordinary meanings, which in any event will seldom be in watertight compartments, the meanings best suited to the statutory document as a whole.
30. Subsection 8(1) of the Currency Act provides that the unit of currency of Australia is the dollar. The Australian Dollar is the only legally recognised form of payment in Australia (apart from the currency of some other country) under sections 9 and 11 of the Currency Act (see paragraph 19 above for the relevant aspects of sections 9 and 11).
31. Accordingly, the meaning of 'the currency of Australia' (or 'Australian currency') under the Currency Act is the monetary unit established by that Act as the requisite unit of account, and means of discharging monetary obligations, for all transactions and payments that are not made according to the currency of another country. Conversely, 'the currency of some country other than Australia' - the only other species of 'currency' according to which transactions and payments can proceed under the Currency Act - must be any monetary unit recognised by another country's laws for the same purposes. Therefore, the critical character of the Currency Act's concept of 'currency' is State recognition and adoption of a monetary unit under law. This approach under the Currency Act reflects the position taken in Mann on the Legal Aspects of Money, namely that money 'must exist within some form of legal framework, because it reflects an exercise of sovereignty by the State in question'.29
32. The Commissioner considers that when defining 'foreign currency' as 'a currency other than Australian currency' in section 995-1 of the ITAA 1997, Parliament intended to use the term 'currency' in the same sense that 'currency' is used in the Currency Act - namely, a currency legally recognised as a unit of account and form of payment by the laws of some country. Consistent with the Currency Act, this concept of currency is in turn divided into two types for the purposes of the ITAA 1997: Australian currency on the one hand, and every currency that is legally recognised as a unit of account and form of payment by the laws of any other sovereign state on the other hand (that is, foreign currency).
33. As Bitcoin is not legally recognised as a unit of account and form of payment by the laws of any other sovereign country it is not 'foreign currency' for the purposes of Division 775 of the ITAA 1997.
Appendix 2 - Your comments
34. You are invited to comment on this draft Determination including the proposed date of effect. Please forward your comments to the contact officer by the due date.
35. A compendium of comments is prepared for the consideration of the relevant Rulings Panel or relevant tax officers. An edited version (names and identifying information removed) of the compendium of comments will also be prepared to:
- provide responses to persons providing comments; and
- be published on the ATO website at www.ato.gov.au.
Please advise if you do not want your comments included in the edited version of the compendium.
| Due date:
|| 3 October 2014
|Contact officer details have been removed following publication of the final ruling.
© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA
You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
Brito, J and Castillo, A 'Bitcoin: A Primer for Policymakers', Policy, Summer 2013-2014, vol. 29, no. 4, pp 3-12.
Bradbury, D 'The problem with Bitcoin', Computer Fraud & Security November 2013, issue 11, pp 5-8.
Refer note 1 above at p 4.
See also Guthrie, N 'The End of Cash? Bitcoin, the Regulators and the Courts' Banking & Finance Law Review Apr 2014, vol 29, no. 2, pp 355-367; Moore, T 'The promise and perils of digital currencies' International Journal of Critical Infrastructure Protection, 2013, pp 147-149.
Refer note 1 above at p 4 and see also note 4 above: Guthrie, N at 357 and Moore, T at p 147.
Tindell, K 'Geeks Love the Bitcoin Phenomenon Like They Loved the Internet in 1995' Business Insider 5 April 2013. See also note 2 above at pp 5-6.
For example, Australian dollars, US dollars etcetera. 'Fiat money' is defined as 'Money that a government has declared to be legal tender, although it has no intrinsic value and is not backed by reserves. Most of the world's paper money is now fiat money.': A Dictionary of Finance and Banking (Oxford) 4th revised ed.
See note 2 above at p 5.
See note 1 above at p 4.
Villasenor, J 'Secure Bitcoin Storage: A Q&A With Three Bitcoin Company CEOs' Forbes 26 April 2014.
See note 1 above at p 4.
Wiener, H, Zelnik, J, Tarshish, I, & Rodgers, M 'Chomping at the Bit: U.S. Federal Income Taxation of Bitcoin Transactions' Journal Of Taxation Of Financial Products (2013) vol. 11, no. 3, pp. 35-47 at 35.
Kondor D, Posfai M, Csabai I, Vattay G 'Do the Rich Get Richer? An Empirical Analysis of the Bitcoin Transaction Network' (2014) PLoS ONE vol. 9, issue 2 pp 1-10 at p 1.
See note 1 above at p 4.
 HCA 29; (1996) 187 CLR 579; (1996) 140 ALR 1; (1996) 70 ALJR 995; 96 ATC 5071; (1996) 35 ATR 91.
(Corrigendum dated 4 February 2009)  FCA 1961; 2008 ATC 20-087; (2008) 71 ATR 216.
 FCA 756.
 2 QB 111.
C. Proctor, Mann on the Legal Aspects of Money (Oxford University Press, 6th Ed, 2005) at [1.11].
Ibid, at [1.12].
Ibid, at [1.13].
Given the anonymous nature of bitcoin and the fact that a Bitcoin user can have, and usually will have, many Bitcoin addresses, it is difficult to determine precisely the current number of Bitcoin users. Recent estimates are that there are approximately 500,000 Bitcoin users worldwide, and that it is likely that fewer than one in ten businesses would currently accept payment in bitcoins even in the United States, where Bitcoin is most widely used. These rough figures suggest that Bitcoin use at present is far from universal and is rather uncommon.
Attorney-General (NSW) v. Brewery Employees Union of New South Wales (1908) 6 CLR 469 at 531. See also the other authorities discussed in Pearce and Geddes, Statutory Interpretation in Australia (7th ed, 2011) at 128 [4.13].
(1985) 3 NSWLR 475.
(1985) 3 NSWLR 475 at 484. For an example of the application of this principle, see Johnson v. Native Title Registrar  FCA 142 at -.
Proctor, Mann on the Legal Aspects of Money, (6th ed, 2005) at 14 [1.12].
Not previously issued as a draft
ITAA 1997 Div 775
ITAA 1997 775-15(4)
ITAA 1997 995-1
Currency Act 1965 (Cth) 8(1)
Currency Act 1965 (Cth) 9(1)
Currency Act 1965 (Cth) 11(1)
Financial Transaction Report Act 1988 31(1)
Constitution (Cth) 51(xii)
Attorney-General (NSW) v. Brewery Employees Union of New South Wales
(1908) 6 CLR 469
Gamer's Motors Centre (Newcastle) Pty Ltd v. Natwest Wholesaler Pty Ltd
(1985) 3 NSWLR 475
Johnson v. Native Title Registrar
 FCA 142
Leask v. Commonwealth
 HCA 29
(1996) 187 CLR 579
(1996) 140 ALR 1
(1996) 70 ALJR 995
96 ATC 5071
(1996) 35 ATR 91
Messenger Press Proprietary Ltd v. FC of T
 FCA 756
2012 ATC 20-234
Miller v. Race
(1758) 1 Burrow 452
97 ER 398
Moss v. Hancock
 2 QB 111
Travelex Limited v. Commissioner of Taxation (Corrigendum dated 4 February 2009)
 FCA 1961
2008 ATC 20-087
(2008) 71 ATR 216
A Dictionary of Finance and Banking (Oxford) 4th revised ed
The Macquarie Dictionary, [Online], viewed 13 August 2014, www.macquariedictionary.com.au.
Oxford Dictionary of English (3rd ed)
Brito, J and Castillo, A 'Bitcoin: A Primer for Policymakers', Policy, Summer 2013-2014, vol. 29, no. 4
Wiener, H, Zelnik, J, Tarshish, I, & Rodgers, M 'Chomping at the Bit: U.S. Federal Income Taxation of Bitcoin Transactions' Journal Of Taxation Of Financial Products (2013) vol. 11, no. 3
Kondor D, Posfai M, Csabai I, Vattay G 'Do the Rich Get Richer? An Empirical Analysis of the Bitcoin Transaction Network' (2014) PLoS ONE vol. 9, issue 2
Tindell, K 'Geeks Love the Bitcoin Phenomenon Like They Loved the Internet in 1995' Business Insider 5 April 2013
C. Proctor, Mann on the Legal Aspects of Money (Oxford University Press, 6th ed, 2005)
Villasenor, J 'Secure Bitcoin Storage: A Q&A With Three Bitcoin Company CEOs' Forbes 26 April 2014
Pearce and Geddes, Statutory Interpretation in Australia (7th ed, 2011)
Guthrie, N 'The End of Cash? Bitcoin, the Regulators and the Courts' Banking & Finance Law Review Apr 2014, vol 29, no. 2,
Bradbury, D 'The problem with Bitcoin', Computer Fraud & Security November 2013, issue 11,