The ATO published a draft GST ruling earlier this month with regards to the GST consequences of trading in Bitcoins. This comment sets out the relevant parts of the draft ruling and a response to those parts extracted.
Extract from GSTR 2014/D3
5. A transfer of bitcoin is a ‘supply’ for GST purposes. The exclusion from the definition of supply for supplies of money does not apply to bitcoin because bitcoin is not ‘money’ for the purposes of the GST Act.
What is Bitcoin?
21. The Oxford Dictionary of English 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.
22. It is described by commentators as ‘a virtual currency that essentially operates as online cash’ and as a ‘crypto-currency, designed to reinvent the way that money works’. Bitcoin operates as a decentralized peer-to-peer payment network whose implementation relies on the use of public-key cryptography to validate transactions involving existing bitcoin and in doing so generates new bitcoin. The Bitcoin system is decentralized in that it is not under the control of a central authority. 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’.
23. 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:
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.
24. Bitcoins that are already in circulation can be acquired either by exchanging ‘national’ or ‘fiat’ currencies 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.
25. 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.
26. Bitcoin uses public key cryptography to make and verify digital signatures used in Bitcoin transactions. Each user is assigned a ‘public/private’ keypair which is saved to that person’s Bitcoin wallet. A Bitcoin wallet has been described as something ‘that stores the digital credentials for [a person’s] bitcoin holdings’.
27. 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. 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.
28. 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. 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.
29. 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.
The GST Act’s definition of money
The ATO considered the definition of money in s 195-1 of the GST Act where money is given an inclusive definition.
(a) currency (whether of Australia or any other country); and
(b) promissory notes and bills of exchange; and
(c) any negotiable instrument used or circulated, or intended for use or circulation, as currency (whether of Australia or of any other country); and
(d) postal notes and money orders; and
(e) whatever is supplied as payment by way of:
(i) credit card or debit card; or
(ii) crediting or debiting an account; or
(iii) creation or transfer of a debt.
However, it does not include:
(f) a collector’s piece; or
(g) an investment article; or
(h) an item of numismatic interest; or
(i) currency the market value of which exceeds its stated value as legal tender in the country of issue.
The ATO’s reasons
It is not controversial that the ATO came to the decision that Bitcoin was not currency, it not satisfying the definition of currency under the Currency Act 1965 (Cth). Nor was it controversial that the ATO came to the conclusion that Bitcoin did not satisfy parts (b) to (d) of the definition of money, given that parts (b) to (d) contemplate specific banking and financial concepts. Further, the ATO very likely came to the correct conclusion that Bitcoin did not satisfy part (e) of the definition, Bitcoin being not a supply by way of credit card, an account, or the transfer of a debt.
The ATO then considered the broader meaning of money and noted:
67. As was noted at paragraph 31, the definition of ‘money’ in the GST Act is an inclusive definition which generally indicates something broader than what follows in a statutory definition. Determining whether a broader meaning is intended and the content of that meaning is informed by the statutory context in which the term ‘money’ appears.
68. In the Commissioner’s view, the use of the term ‘money’ is intended to prescribe fiat currency and those financial instruments and payment mechanisms which are denominated in, or relate directly to, fiat currency.
69. The meaning of ‘money’ in the context of the GST Act was considered in Travelex Limited v. Commissioner of Taxation (Travelex). There Emmett J observed:
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).
The bolded part of Emmett’s judgment can be considered the longstanding definition of money at common law. On the Moss v Hancock view, Bitcoin would very likely satisfy the definition of money at common law. However, the ATO disagreed with the sufficiency of the Moss v Hancock view, which it characterised as the “functional theory to the definition of money”. The ATO continued and said:
71. In the modern era, however, the State theory of ‘money’ requires that, in addition to the functional characteristics described, money ‘must exist within some form of legal framework, because it reflects an exercise of sovereignty by the State in question’.
73. Custom alone, whether it be local or international, cannot make something ‘money’ in the absence of an ‘exercise of monetary sovereignty by the State concerned’. Consistent with statutory context, policy and the wider legislative framework governing Australian currency established by the Currency Act, this is the sense in which the word ‘money’ is used in the section 195-1 definition. Bitcoin, therefore, is not ‘money’ for GST purposes.
Should the state theory of money apply to the GST Act?
The ATO’s draft ruling relies on the premise that the state theory of money poses a necessary condition to the definition of money.
It is my view that if the state theory of money were to apply to the GST Act then it would mean that money can never include a non-currency concept. The conclusion cannot seriously be correct because it would mean the inclusive definition of money is made redundant as part (a) of the definition would give the exclusive definition of money. Furthermore, the fact is that parts (b)-(e) of the definition of money expressly includes concepts which do not derive their efficacy from the exercise of monetary sovereignty by the state. Therefore it must be accepted that money can include concepts which take their value and recognisance by custom and commercial practice.
In any case, it is doubtful whether Mann on Money even goes as far as to advocate the state theory of money. In paragraph [1.11] of the seventh edition, Proctor identifies that:
[The English and Canadian authorities] do not emphasise the legal framework within which money must exist if it is to be used as a final and complete means of discharging financial obligations; indeed the Canadian Supreme Court appears to have taken the view that ‘money’ could exist without any such legal support. By contrast, however, the definitions employed in the Uniform Commercial Code of the United States describe money as ‘a medium of exchange authorised or adopted by a domestic or foreign government as part of its currency’… It seems fair to note that more modern definitions of ‘money’ have tended to adopt a broader approach by including not only bank deposits but even government debt securities, which can readily be converted into cash.
The point to take from Mann on Money is simply that there is no consensus in the common law countries as to the definition of money. In any case, whatever is said in Mann on Money cannot change the task of statutory construction, particularly in light of the inclusive definition in the GST Act, which is in direct contrast to the specific definition in the US Uniform Commercial Code.
The conclusion in paragraph 73 of the ATO’s draft ruling therefore falls once the premise in paragraph 71 is removed. Should it be accepted as a matter of fact that private individuals view Bitcoin as a medium of exchange, a store of value and an item which allows them to discharge their obligations which sound in the payment of money, then Bitcoin should fall within the definition of money in s 195-1 of the GST Act.
What is the policy behind the exception for money in the GST Act?
It is clear that the exception in 9-10(4) for money intends to avoid double taxation as money supplied as payment for a supply should not be a taxable supply in itself (Explanatory Memorandum at [3.7].
On the other hand, it does not serve the policy of the GST Act to remove from the tax base barter-trade transactions. However it would be facile to suggest that Bitcoin is a barter commodity, such as that between an accountant that barters her services for meat supplied from her butcher. Bitcoin as a commodity does not give any utility other than as a medium of exchange (and in some cases as a speculative investment analogous in part to foreign currency). Therefore it is not a commodity that, if not first exchanged for currency, has some other intrinsic value other than as a medium of exchange.
Nonetheless, Bitcoin, as compared to fiat money, has unique advantages and disadvantages, which justifies distinguishing it from fiat money. It is the economic advantages to Bitcoin as compared to fiat money that could justify a different tax treatment to fiat money. I do not purport to explain the features and advantages of Bitcoin in full, save to say that its transferability along with the anonymity associated with its transferral causes it to lose some of the characteristics associated with the specifically included types of money in parts (a) to (e).
However, the policy of the matter should only be relevant if the legal position is ambiguous. Where it is very likely that the state theory of money should not, in the context of the GST Act, augment the common law requirement for money as expressed in Moss v Hancock, the policy of the matter ought to be discounted.
In light of the discussion in the paragraphs above, it is my respectful view that Bitcoin should be considered money in its reference in s 9-10(4) in the GST Act in particular and the GST Act as a whole.
Upon further deliberation, I have come to the conclusion that bitcoin is not money. Whether or not bitcoin is money is a mixed question of law and fact. The factual enquiry requires us to consider whether custom has become sufficiently prevalent that bitcoins are a universally accepted medium of exchange by the people and businesses within this jurisdiction. It comes down to that words “generally accepted”, “common consent and conduct” and “freely from hand to hand… being accepted equally”. Those words, it is submitted import an element of universality about them. Whilst it is not necessary for bitcoins to be accepted by every person and business in the community (after all, credit facilities from banks are not even accepted by every vendor), it must be such that a person in possession of bitcoins should be able to go about his day to day life with some confidence that he or she can use bitcoins as a medium of exchange with an appreciable number of vendors. At the moment, the litmus test can be put thus: would an ordinary person, who was familiar with the concept, but not the trading of bitcoins, today, accept them in satisfaction of a debt or obligation. The answer must necessarily be no, and for many reasons. These reasons include that bitcoin is not a stable store of value and that bitcoins are not accepted by a sufficiently large number of vendors that give a person confidence that he or she can then exchange bitcoins for the goods and services he or she wants with convenience.
Therefore, although I disagree with the ATO’s analysis in GSTR2014/D3, I have come to a similar conclusion that Bitcoin is not money.