A Senate inquiry has recommended a major shift in the regulatory treatment of digital currencies.
The change would remove what advocates of bitcoin have claimed is a major regulatory barrier to the success of Australian businesses based on the crypto-currency.
The headline recommendation of the report, made public today, would significantly alter how the Australian Taxation Office treats bitcoin.
Under guidance issued by the Australian Taxation Office, bitcoin is not treated as a form of currency. Instead, transactions involving bitcoin are treated as a form of barter.
The result is GST will be charged when businesses supply bitcoins and receive bitcoins in return for goods and services. The ATO's decision was decried by the currency's advocates as a form of double taxation.
In its written submission to the inquiry, the tax office indicated that most of the submissions it received in response to its draft bitcoin ruling had generally been in favour of treating it as a currency for income tax and GST purposes, and as a financial supply for GST purposes when it is converted to Australian dollars.
"Whether bitcoin or other crypto-currencies should be treated as ‘money’ or ‘currency’ is a question of policy," the ATO said.
"The committee considers that the most immediate concern for Australian digital currency businesses is the current GST treatment of digital currencies," the Senate inquiry's report states.
"The committee is of the view that digital currency should be treated as money for the purposes of the goods and services tax," the report argues.
Evidence from the ATO during the inquiry was that changing the tax treatment of digital currencies would require amendments to both GST legislation and regulations.
"As such, the committee recommends that the government consults with the states and territories to consider amending the definition of money in the A New Tax System (Goods and Services Tax) Act 1999 and including digital currency in the definition of financial supply in A New Tax System (Goods and Services Tax) Regulations 1999," the report states.
The current treatment of bitcoin "has placed an additional burden on Australian digital currency businesses," the report argues.
Bitcoin advocates that appeared at the inquiry's public hearings called for the GST treatment of the currency to be changed.
Some Australian bitcoin-based businesses have already closed down or relocated overseas, according to the Australian Digital Currency Commerce Association (ADCCA).
The report's recommendation flies in the face of arguments made by Treasury officials before the committee.
Treasury has been monitoring the use of bitcoin in Australia both from a regulatory perspective and a tax perspective.
"I think we will continue to assess the environment, but I would stress that it is an industry in its infancy, so I think to jump in and suggest that there should be changes to the tax law to accommodate it is a little bit early in that process," Kate Preston, general manager of the Treasury's Small Business Tax Division, said at a hearing of the inquiry earlier this year.Read more: Money laundering and digital currencies
Today's report also recommends further analysis on whether digital currencies such as bitcoin should be as akin to foreign currencies for the purposes of income tax and fringe benefits.
"The committee recommends that further examination of appropriate tax treatment of digital currencies should be included in the [federal government's] taxation white paper process, with particular regard to income tax and fringe benefits tax," the report states.
In terms of regulation for business involved the digital currency industry, the report noted concerns raised in evidence submitted to the inquiry about the impact that over-regulation could have on the nascent bitcoin sector.
"As the digital currency industry is still in its early stages, the committee supports a 'wait-and-see' approach to government regulation," the report states.
"The committee believes that the relevant government agencies should closely monitor the development of the digital currency industry in Australia, and conduct further research to determine the actual risks and opportunities presented by different types of digital currency businesses, for example Bitcoin exchanges and ATMs, or payment facilities."
However, the inquiry did back the Attorney-General's Department's statutory review into Australia's anti-money laundering and counter-terrorism financing laws, which is considering whether digital currency businesses should be part of Australia's AML/CTF regime.
Australia's anti-money laundering watchdog, AUSTRAC, has examined the potential use of digital currencies in money laundering.
Late last year the Australian Crime Commission revealed the existence of an operation to monitor the use of digital currencies, including bitcoin, by criminals.
Today's report also recommended the government consider setting up a 'Digital Economy Taskforce' in order to "gather further information on the uses, opportunities and risks associated with digital currencies".
"This will enable regulators, such as the Reserve Bank of Australia and ASIC, to monitor and determine if and when it may be appropriate to regulate certain digital currency businesses," the report states.
"In the meantime, the committee supports ADCCA's continued development of a self-regulation model, in consultation with government agencies."
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