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What are Australian tax issues for a business accepting cryptocurrency?
The content in this article is provided for general information purposes and is not tax, legal, investment or other professional advice. Readers should seek appropriate professional advice prior to making any decision.
More and more these days Australians have cryptocurrency and are looking at ways to spend it. Some businesses are seeing this as a great marketing opportunity, in that they can accept cryptocurrency for payment and promote their business to new customers. So how can you do this and what are the tax implications?
The most common ways in which businesses accept cryptocurrency are:
- Accept using existing wallet infrastructure
- Partner with a payment processor and immediately convert to AUD
- Partner with a payment processor and keep the crypto
This article takes a look at these three options and explains the associated tax issues.
Option 1: Accept using existing wallet infrastructure
One of the quickest ways for a business to begin accepting cryptocurrency is to simply use an existing wallet infrastructure. For example, someone in the business creates a bitcoin wallet and uses this to allow customers to pay to the associated address. Major drawbacks with this approach are it does not conveniently integrate into existing payment procedures, the merchant needs to implement security measures to safeguard ownership (which requires a decent amount of knowledge) and communicating how much cryptocurrency a customer needs to pay can be an inconvenient process because of fluctuating exchange rates. Due to these reasons, very few businesses use this approach.
If your business does implement this approach, then the tax implications are similar to option three, as explained below.
Option 2: Partner with a payment processor and immediately convert to AUD
It is a more common approach for businesses to partner with a cryptocurrency payment processor. By doing so, the business can utilise the payment processors invoicing/point of sale system to allow customers to pay bills. The payment processor handles generation of a cryptocurrency address, the conversion rate and monitoring of payment. The cryptocurrency can then be immediately converted to Australian dollars, meaning the payment processor exchanges the cryptocurrency to Australian dollars on behalf of the business, and accordingly, the business is not subject to fluctuating exchange rates. The Australian dollars are then remitted to the business bank account as per the settlement terms of the payment processor (e.g. once per week provided minimum settlement amount of $1,000). For this service, the payment processor charges a fee, typically about 1% of the payment (e.g. if you make a sale for $2,000, the payment processor takes $20 and remits $1,980 to your bank account).
For accounting and taxation purposes, this is a relatively simple approach. This is because the business does not ever own any cryptocurrency and therefore does not have to monitor gains and losses arising from cryptocurrency disposals. Instead, the business records sales as per usual, with the payment processor fee, and reconciles sales to bank deposits and unsettled AUD held with the payment processor (if any). For GST, the sales are treated the same as if they were paid directly with dollars.
Option 3: Partner with a payment processor and keep the crypto
A business can partner with a payment processor, as explained in option 2, except instead of arranging an exchange of crypto to AUD, the business can choose to keep the cryptocurrency. The payment processor offers a cryptocurrency wallet and so cryptocurrency received is deposited to this wallet; or alternatively the business can choose to have the payment processor transfer the cryptocurrency to an external wallet setup by the business.
This option presents more complex accounting and taxation issues. For accounting, the business needs to book sales in dollars and will have a corresponding debit entry to book acquisition of cryptocurrency. The cryptocurrency is held by the business as trading stock. When the business eventually disposes of the cryptocurrency, the business needs to record this as a sale in Australian dollars; giving rise to a taxable profit or loss. If cryptocurrency is held at the end of the financial year, the cryptocurrency needs to be brought to account as per trading stock rules at either cost, replacement value or market selling value. These entries will likely require manual bookkeeping because current accounting software lacks features similar to bank feeds to automate the process.
The disposal of cryptocurrency is also likely to attract GST implications. Disposal shouldn’t result in 10% GST applying, although there are reporting requirements which add an additional layer of compliance.
As a business owner contemplating accepting cryptocurrency, you should seek advice from a cryptocurrency specialist accountant to understand the implications and put in place a tax effective strategy. Feel welcome to contact us if you require assistance.