The Australian Taxation Office (ATO) has been grappling for years with the difficult question on how to classify the digital currency bitcoin.

Freedom of Information (FOI) documents obtained by AM show the tax office has been keeping a detailed watching brief on bitcoin-related issues and news.

The file shows a few years ago the agency was sceptical, but soon realised that people could use internet currencies to avoid paying tax, and became worried about the currency's significant growth.

Now it appears the tax office has got its head around digital currencies and is preparing to release rules on how it will treat bitcoin transactions under taxation law.

Bitcoin is a digital currency used to buy things on the internet and increasingly in physical shops.

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Since it was invented in 2009, the question of how to deal with it has plagued the world's governments, but providing an answer has been far from simple.

The FOI documents show the tax office preparing to release the country's first definitive ruling on how bitcoin will be treated, and taxed in Australia.

"I think it's quite exciting that the tax office is actually recognising bitcoin," said Jason Williams, president of the Bitcoin Association of Australia.

"I really hope that the tax office identifies bitcoin as money and it is treated accordingly."

The tax office will decide if bitcoin should be treated as money - like foreign exchange currencies are - or as goods.

If it is not treated as money, it would be similar to the way barter transactions work, which require more complex accounting and attract different taxes.

"From a merchant perspective, it will make things more complicated, or potentially more complicated. If the usability of bitcoin goes down, the industry is not going to flourish very well in Australia. In fact the opposite is more than likely true," Mr Williams said.

The ATO says it will release its digital currency guidance by the end of the financial year.

Freedom of Information documents show the tax ruling has been in the works for some time.

Ron Tucker from the Australian Digital Currency Commerce Association says the industry wants certainty and a tax ruling will help that.

"Whatever financial instrument that we're dealing with, or any kind of asset or commodity or instrument to business needs to be, number one, transparent and I think it needs to benefit all parties involved," Mr Tucker said.

Bitcoin is transferred via the internet and as such countries have limited control in how it is moved around the world.

The ATO is worried about that too, especially with the huge growth of bitcoin in China.

One FOI document says that since China controls a large portion of the bitcoin market, if the currency becomes more mainstream, China will be able to exert even more influence on global economies.

Mr Williams says governments will have to get used to it.

"Bitcoin's not going away. The genie is out of the bottle; we really need to embrace it and make the most of it," he said.

The ATO is far from the only arm of government grappling with the rise of digital currencies.

Other FOI documents obtained by AM show the Reserve Bank has produced in-depth reports about bitcoin.

One report found that if the currency was more widely used, it could reduce the bank's ability to implement monetary policy because of loss of control over the money and credit creation process.

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