Cryptocurrency – what is it?
You have no doubt heard of bitcoin and other cryptocurrencies – do you understand them so you can consider them for your business?
Cryptocurrency like any other currency is used online as payment for goods and services. Cryptocurrency is used by many online companies, they issue their own currency in the form of tokens. Reference these tokens as you would casino chips, they can be used while online. You can even convert real currency such as Australian dollar and you exchange it for cryptocurrency and vice versa.
Cryptocurrency exists only on computers. There are no notes or coins, there is no reserve at Fort Knox or the Bank of England
The real plus is the security offered by using cryptocurrency as it uses a technology known as the blockchain. Blockchain is spread across several computers, it is “decentralized” technology managing and recording transactions.
Brief History of Cryptocurrency
In the 1990s, a group of internet users known as cyberpunks attempted to create digital cash. Their two attempts Digicash and Cybercash failed. In 2009 someone calling himself Satoshi Nakamoto created the first decentralized digital cash that was called Bitcoin. Bitcoin was the model for all other cryptocurrencies to come after that. By 2011, Nakamoto had disappeared from the cryptocurrency scene, and his real identity is not known to this day.
The first bitcoin transaction occurred on January 12, 2009, Nakamoto sent 10 BTC to a coder, Hal Finney.
Bitcoin, the first successful cryptocurrency, was distributed through blockchain technology a.k.a. Distributed Ledger Technology. The data or Bitcoin is decentralized, a distribution chain giving everyone transparent access at the same time. Blockchain is revolutionary as it stops fraud, reduces risk, is transparent, and there are no third parties. It uses unique codes for each user, cryptography, preventing user information from being accessed by others.
How many Cryptocurrencies are there?
The short answer is that there are many – Wikipedia has 30 Cryptocurrencies listed. Amazon, Google and Facebook among others are also developing their own cryptocurrencies.
Australian Tax Office ( ATO Cryptocurrency)
The ATO direction is
“Cryptocurrency is legal in Australia, but taxes vary depending on how you use the cryptocurrency.
If you receive cryptocurrency for goods or services you provide as part of your business, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income. This is the same process as receiving any other non-cash consideration under a barter transaction.
If you run Crypto currency business then ‘trading stock’ rules apply not CGT”
Cryptocurrencies’ look like they are here to stay and from a cyber-security point of view has some strong advantages. It also means that currencies are no longer the dominion of national governments, but it is unclear what that could mean with futurists depicting all sorts of utopian or dystopian futures.
In reality it means that
- At some stage your business will need to consider whether it will accept or use crypto currencies to make to receive payments.
- Make sure you understand the tax rules and get appropriate advice.
- Your business cyber security becomes even more important – if you lose the keys to your cryptocurrency then they are gone for good. (Although this potentially true for your normal banking accounts and customer data.)
Falk, Tim. Beginner’s guide to cryptocurrency tax in Australia. Finder. June 18, 2019 Royal, James, PH.D. & Voight. Kevin. What Is Cryptocurrency? Here’s What You Should Know. Nerdwallet. June 18, 2019. Update. What is Cryptocurrency? Your Complete Crypto ABC. BitDegree. December 31, 2019.
ATO Bitcoin: https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?page=3