Rum and bitcoin – an unlikely pairing

While regaling us with a history of the rum rebellion that would make any North Queenslander proud, Deputy President Bernard J McCabe of the Administrative Appeals Tribunal has confirmed that bitcoin is not foreign currency for the purposes of Division 775 of the Income Tax Assessment Act 1997 (1997 Act).

Division 775 seeks to apply revenue treatment to gains and losses that arise in respect of foreign currency. That treatment can also apply to unrealised gains and losses.

This decision affirms the views that we, and others, have held for some time that subject to law reform, the rules governing the treatment of foreign currency gains and losses for tax purposes set out in Division 775 of the 1997 Act will not apply to most cryptocurrencies. It also seems that based on this decision, pegged cryptocurrencies will not be a 'foreign currency' for the purposes of Division 775 of the 1997 Act.

It remains to be seen whether the decision will be appealed, particularly given that it may be unpopular with many in the cryptocurrency community.

Practically, this means that where cryptocurrencies are held on revenue account, gains and losses are still assessable or deductible (as the case may be), without regard to the CGT discount or to the ‘personal use asset’ exemption. Alternatively, if cryptocurrencies are held on capital account, the capital gains and losses are dealt with under the CGT provisions in Part 3.1 of the 1997 Act.

What is a ‘foreign currency’ for the purpose of the 1997 Act

Section 995-1 of the 1997 Act defines ‘foreign currency’ as ‘a currency other than an Australian currency’. The section does not define ‘Australian currency’. However, Deputy President McCabe noted that the term presumably refers to the official currency established under the Currency Act 1965. He also referred to the following observations of Brennan J in Leask v The Commonwealth [1996] HCA 29:

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... [emphasis added][4]

Since 2014, the Commissioner of Taxation’s (Commissioner) view has been that bitcoin is neither currency and, therefore, is not a 'foreign currency' for the purposes of Division 775 of the 1997 Act. This view is set out in Taxation Determination TD 2014/25. Very broadly, this is because in the Commissioner’s view the value of bitcoin is ‘not derived from gold or government fiat, but from the value that people assign it’.

An awkward answer… for now

The taxpayer advanced a number of arguments about why ‘currency’ should not be confined to the money of a particular nation. This included an argument that the defining qualities of a currency were that it was ‘fungible, measurable and used as a medium of exchange for goods and services’.

In the taxpayer’s view, bitcoin met this criteria. In this regard, the taxpayer was undoubtedly correct; in 2020 bitcoin is indeed fungible, measurable and used as a medium of exchange for goods and services.

However, Deputy President McCabe noted that while the definition of ‘foreign currency’ was expressed awkwardly:

…the meaning is clear enough: the reference to “an Australian currency” is plainly a reference to the unit of exchange established in the Currency Act, and the reference to “[an]other currency” must be interpreted in light of that comparator. It follows the “other currency” in question must be an official currency issued or recognised by a sovereign state.

The taxpayer also argued that there were good policy reasons for including gains and losses on dealings in bitcoin within the rules set out in Division 775 of the 1997 Act.

However, Deputy President McCabe found in favour of the Commissioner, noting that any good policy reasons for a change to the position that bitcoin was not a foreign currency were a question for law reform.