This information is brought to you by business.gov.auDigital currencies such as Bitcoin are an increasingly popular option for accepting and making payments in Australia. If you’re looking at accepting or using Bitcoin in your business, or already do so, knowing the facts upfront can save you time and money later on.
What are digital currencies and crypto-currencies?
Digital currencies are similar to money. They can be used to buy goods and services, bought and sold in exchange markets and are created in limited amounts.
However, there are some important differences:
- Digital currencies don’t physically exist as coins or notes. Instead, they’re created by computers and stored electronically.
- Businesses don’t have to accept payment by digital currency as it isn’t considered legal tender.
- They’re not supported by banks or government, which means you’re less protected if your digital currency is stolen.
- The value of digital currency can change more quickly than traditional currency.
Crypto-currencies are a type of digital currency that are encoded to make them harder to counterfeit. Bitcoin is a well-known crypto-currency.
How does Bitcoin work?
Bitcoin is considered the most well-known of digital currencies. Here’s a quick rundown of how it works:
How do you earn Bitcoins?
Bitcoins are earned by people using the processing power of their computer to solve complex calculations. This process is called ‘mining‘. You can also buy Bitcoins online using real money, or in exchange for goods and services.
How are Bitcoins stored and used?
Bitcoins are stored in a digital wallet. With a Bitcoin wallet you can buy and sell Bitcoin and also use it when paying for goods and services.
Learn more about how Bitcoins work.
How do I accept Bitcoin in my business?
To receive payment by Bitcoin or other digital currencies, you’ll need software for that currency. For example, to accept Bitcoin, you’ll need to download and install a Bitcoin wallet and decide how you would like to accept payments.
Different ways of accepting payment include:
- QR codes that allow customers to use their smart phone or tablet
- payment processing systems that automatically convert digital currency to real currency
- custom Point of Sale (POS) terminals that integrate with your existing sales register.
Should I accept Bitcoin payments?
Bitcoin can offer an alternative method of payment for your customers and lower transaction fees for your business.
When making your decision, make sure you’ve considered the risks associated with digital currencies.
Bitcoin and other crypto-currencies aren’t considered to be money or foreign currency by the Australian Tax Office (ATO). Instead, they’re treated as assets for capital gains tax purposes, making them more like a barter arrangement.
If you receive payment by Bitcoin, you’ll need to record:
- the date of the transaction
- the amount in Australian dollars (a reputable bitcoin exchange can tell you this)
- what the transaction was for
- who the other person or business was (a Bitcoin address is enough).
Bitcoin payments made to you by customers will become part of your taxable income. You may also have to pay GST when receiving Bitcoin in return for goods and services.
Visit the ATO website for more on the tax treatment of crypto-currencies in Australia.
Using Bitcoin to pay employees
How you pay your staff with Bitcoin will determine your tax obligations.
Paid as part of normal salary
If you pay your staff with Bitcoin as part of their salary, the amount you give is considered a fringe benefit, or ‘non-cash benefit’. This means that:
- Pay As You Go (PAYG) withholding won’t apply to the Bitcoin payment
- your employee isn’t liable to pay income tax on the amount.
However, you will need to pay Fringe Benefits Tax (FBT) on the amount of Bitcoin you give.
Tomas decides to offer Bitcoins to some of his staff as part of their salary packages. In addition to their regular salary, they’ll receive some Bitcoin too. This arrangement will be offered to new starters as well as staff that are already employed by Tomas.
For employees that accept Tomas’ offer, the Bitcoins they receive are a fringe benefit. Tomas will need to pay FBT on this amount.
Paid under a salary sacrifice arrangement
If your employee is receiving Bitcoin as part of a valid salary sacrifice arrangement, the payment is a fringe benefit for tax purposes. PAYG withholding won’t apply.
Requested by employee at time of pay
If your employee asks that some, or all, of their salary be changed to Bitcoin once they have earned the right to be paid their salary, the Bitcoin amount is treated as normal salary for tax purposes. This arrangement is called an ‘ineffective salary sacrifice arrangement’.
Susan pays her employees every second Thursday. When Susan is processing payments for the previous fortnight, an employee asks if he can receive half of his pay in Bitcoin instead of cash. Susan agrees.
Since Susan’s employee has already earned the right to be paid, the Bitcoin amount is considered normal wages and he must include it as taxable income. Susan will include the full salary, including Bitcoin, when processing PAYG withholding and superannuation. FBT will not apply.
Have your say on the future of digital currencies in Australia
As a business owner, you have the opportunity to shape the future of digital currencies in Australia.
To give your comments on the tax treatment of digital currencies by the ATO, check out their list of draft documents open for consultation.
For more consultations like this, visit our Business Consultation website.
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