This naturally raises questions of how revenue authorities should be taxing cryptocurrencies generally.
In terms of background, a cryptocurrency is a digital "currency" in which encryption techniques are used to regulate the generation of units and verify the transfer of ownership, operating independently of a central bank.
When you buy cryptocurrency it is held in a 'digital wallet', and can then be used to buy goods or services from anyone willing to accept it.
Cryptocurrencies can be bought and sold on cryptocurrency exchanges, and you won't actually find one in your Christmas stocking, since they're all just lines of code.
In terms of legal status, the Financial Markets Authority considers that cryptocurrencies are not legal tender (and this is the same around the world).
Rather, most cryptocurrencies are intrinsic tokens, that is they are not pegged to a dollar or paying any sort of dividend.
The correct tax treatment will depend on the characteristics of the currency.
The most likely is that it would be treated as property, which means that any gains could be taxable on sale – again, this isn't certain, as the rules on property sales depend on the reason the property was acquired.
If Inland Revenue takes the view that intrinsic token type cryptocurrencies are property, they are likely to treat it in the same way as gold bullion – that is, in almost all circumstances your bitcoin will be acquired for the purpose of cashing it in at some future time.
The holder of a cryptocurrency would have to demonstrate that it wasn't held for sale to convince Inland Revenue of any other outcome – for example if it provides an income stream during the period of ownership, like the dividend payable on a share.
The alternative way of taxing cryptocurrency would be to treat it as a financial arrangement, akin to currency, which, depending on the value of the cryptocurrency held, could mean that unrealised gains are taxable.
Other countries are also grappling with the right way to tax cryptocurrencies. In the United States, the IRS has released guidance that cryptocurrency is property when held on capital account, and gains are subject to capital gains tax.
Miners of currency should pay tax on the value of the currency they receive. Similarly, both the UK and Australia tax gains from the sale of cryptocurrencies under their capital gains tax rules.
In terms of GST, buying cryptocurrencies and then using them to buy other goods and services could result in double tax.
The purchase of the unit of cryptocurrency would be subject to GST, and then any subsequent purchase with the cryptocurrency would also be subject to GST.
Deeming cryptocurrencies to be currency for GST purposes would remove GST from the sale or purchase of any units, solving the double tax problem. Australia is moving to treat cryptocurrencies like a currency for GST purposes (from 1 July 2018) for this reason.
Regardless of the taxable status of your new cryptocurrency, savour the moment and hopefully you thanked Santa, else you may receive a lump of coal this year.
