Why you should be careful of Bitcoin

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Anyone thinking of making use of bitcoins, an unregulated digital currency, should take careful stock of the risks.

One is the recent extreme volatility of their value, which surged by 400% in less than a month late last year before being hit by China's decision to ban its banks from providing any support for the virtual currency.

It then recovered strongly when major online games site Zynga said it would start accepting bitcoin payment for some of its services.

The other risk is the issue of how profits made using virtual currencies will be taxed. As Terry Hayes, senior tax writer for Thomson Reuters Weekly Tax Bulletin, has noted, the US Senate has expressed concern about the use of bitcoins. Under US tax law, gains made using this or any other virtual currency would, at least in theory, be taxable.

As for Australia, Hayes says that at present there is no known tax office guidance directly concerning bitcoins. It has, however, published guidance on the tax treatment of bartering, which would presumably cover the use of virtual currencies.

Income earned through exchanging goods or services with others, whether in the form of cash, bitcoins or barter transactions, would generally be included as assessable income. Those involved in bartering are required to keep records listing all transactions.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.