GST Implications of Using Digital Currency as Payment

Overview

As cryptocurrencies gain wider acceptance, their convenience and efficiency have become increasingly attractive to enterprises of all sizes. This trend has led to a growing number of businesses accepting digital currency payments for their products and services.

Several factors contribute to this trend:
– The decentralized nature of cryptocurrencies bypasses traditional banking systems, reducing transaction fees and facilitating faster cross-border transactions.
– The transparency and security offered by blockchain technology instill trust among businesses and consumers, mitigating concerns regarding fraud and counterfeiting.
– The growing integration of digital currencies into mainstream financial platforms and payment processors simplifies adoption for businesses.

However, the acceptance of digital currency as payment necessitates special rules for reporting GST on such transactions.

Conversion of Digital Currency

Broadly speaking, if payment is made or received using digital currency, it must be converted to Australian dollars. This process involves several steps guided by two separate ATO determinations:
– Goods and Services Tax: Foreign Currency Conversion Determination 2018
– Goods and Services Tax: Digital Currency Conversion Determination 2019

Conversion Steps

Step 1 – Determine the Conversion Day

The “conversion day” is the date used to convert digital currency into Australian dollars. The conversion day varies depending on whether you account for GST on a cash or non-cash (accruals) basis.

If you account for GST on a cash basis, the conversion day is either:
– The transaction date
– The invoice date
– The day on which any of the consideration is received for your supply

The transaction date is defined in legislative instrument FOREX 2018/1 as “the date you use for foreign currency conversion in your accounting system under the relevant accounting standard.” For most small-to-medium businesses, this option is less common as they do not report according to Accounting Standards.

If you account for GST on a non-cash (accruals) basis, the conversion day is the earlier of:
– The transaction date
– The invoice date
– The day on which any of the consideration is received for your supply

Step 2 – Determine the Exchange Rate for the Digital Currency

Choose the exchange rate from one of the following:
– A digital currency exchange – an entity that provides a trading platform/exchange for digital currencies and publicly provides exchange rates.
– A digital currency website – a website that publicly provides exchange rates without offering a trading platform/exchange.
– The agreed rate – a specific exchange rate agreed upon between a supplier and a recipient, applicable to supplies made under an agreement for the duration of the agreement.

Whichever rate style is chosen, it must be used consistently.

Step 3 (if required) – Convert the Exchange Rate for the Digital Currency into Australian Dollars

Choose the rate from one of the following:
– The RBA rate – the unit of foreign currency per A$ specified by the RBA as the 4:00 pm AEST rate on that RBA business day or the previous RBA business day.
– The rate published by a foreign exchange organization – an organization that publicly provides exchange rates.
– The agreed rate – as defined in Step 2.

For the taxable supply of offshore low-value goods, a rate chosen under the GST: Foreign Currency (Customs Value of Low Value Goods) Determination 2018 can also be used. Whichever rate style is chosen, it must be used consistently.

Worked Example

Phillipi operates a web consultancy business and accepts various types of digital currency as payment. Phillipi reports GST on a cash basis.

On 1 May, Brimson Pty Ltd pays Phillipi 0.7 Ether (ETH) for redesigning its website’s homepage. Phillipi completes the work on 20 May.

Phillipi chooses the day on which the consideration was received (1 May) as the conversion day, Coinbase as the digital currency exchange, and Xe.com as the foreign exchange organization.

On 1 May, Coinbase traded ETH for $3,084.90 USD, while Xe.com offered Australian dollars (A$) for 0.675 USD. The consideration received by Phillipi for the web consulting services is calculated as follows:

(0.7 ETH * $3,084.90, USD / 0.675 = $3,199.15 AUD)

Of this amount, 1/11th, or $290.83 AUD, represents GST collected and must be reported by Phillipi on his BAS.

Brimson Pty Ltd must navigate the same framework to determine its GST credit. However, the GST calculated by Phillipi and the GST credit calculated by Brimson Pty Ltd may not match. This discrepancy could result from Brimson Pty Ltd reporting GST on a different basis than Phillipi and making different choices regarding the conversion of both digital and foreign currency.