Bitcoin and other virtual currencies
Many virtual currencies, such as Bitcoin have emerged over the
last 10 years but just how safe are they? We explain how virtual
currencies work and the risks you take buying, trading or investing
What are virtual currencies?
Virtual currencies are digital currency or electronic money.
They do not physically exist as coins or notes.
Many digital currencies (also called crypto currencies) started
in online gaming communities or on social media.
Although they can be used as a form of payment if another person
is willing to accept them, they are not legal tender. The value of
virtual currency can fluctuate significantly, they may not be
accepted in many places and they are not guaranteed by any bank or
How do virtual currencies work?
Users can 'earn' or create virtual currency. For
example, in the Bitcoin network, users (known as Bitcoin
Miners) can participate by using computer-intensive software
to validate transactions that have been made through the
network and earn new bitcoins as a reward.
There are usually only a fixed number of virtual currency units
Virtual currencies can be bought or sold on an exchange platform
using conventional money. Trading fees are charged and are usually
based on the trade value. As virtual currencies have become more
popular, new ways to buy and sell them have developed. For example,
bitcoins can be bought or sold for cash through special ATMs.
Virtual currencies are kept in a digital wallet and can be used
to pay for actual goods and services from any person willing to
accept them as payment. Virtual currency payments are made online,
however some merchants have facilities in place to accept virtual
currency payments in store using mobile devices. Virtual currency
networks generally have no or low transaction fees.
What are the risks?
If you want to buy, trade or invest in virtual currencies the
Virtual currencies have less safeguards
The exchange platforms on which you buy and sell virtual
currencies are generally not regulated, which means that if the
platform fails or is hacked, you are not protected and have no
statutory recourse. Virtual currency failures in the past have made
investors lose significant amounts of real money. Some countries
are moving towards regulating virtual currencies, however virtual
currencies are not recognised as legal tender.
The value of a virtual currency can fluctuate wildly. The value
is largely based on its popularity at a given time which will be
influenced by factors such as the number of people using the
currency and the ease with which it can be traded or used.
Your money could be stolen
Just as your real wallet can be stolen by a thief, the contents
of your digital wallet can be stolen by a computer hacker.
Your digital wallet has a public key and a private key, like a
password or a PIN number. However, virtual currency systems allow
users to remain relatively anonymous and there is no central data
bank. If hackers steal your digital currency you have little hope
of getting it back.
You also have no protection against unauthorised or incorrect
debits from your digital wallet.
Popular with criminals
The relatively anonymous nature of virtual currencies makes
them attractive to criminals who may use them for money
laundering and other illegal activities.
Are virtual currencies
If the cost of your bitcoins is less than $10,000 and you are
only using them to pay for personal goods or services, they are not
taxed. However, according to the ATO, if you are using
crypto-currencies such as bitcoins for other purposes, you will be
taxed. Here is an outline of the ATO's proposed tax treatment
- Investment - If you are holding bitcoins as an
investment you will pay capital gains tax on any profits
when you dispose of them
- Trading - If you are trading bitcoins for
profit, the profits will form part of your assessable income
- Carrying on a business - If you are using
bitcoins as payment for goods or services or accepting bitcoins as
payment for goods or services, the transactions will be subject to
- Mining bitcoin - If you are mining bitcoins,
any profits you make will be included in your assessable
- Conducting an exchange - If you are buying and
selling bitcoins as an exchange service you will pay income tax on
the profits and transactions will be subject to GST
For more information see ATO:
tax treatment of crypto-currencies in Australia.
Where can I find out more?
A Senate Committee has completed an inquiry into digital
currencies. The inquiry report, Digital currency - game changer or bit
player, highlights the opportunities that these new
technologies and payment methods are providing, but also
acknowledges the risks.
If you decide to trade or use virtual currencies
you may be taking on a lot of risk with no recourse if
things go wrong.
Last updated: 08 Sep 2016