Update on Tax Status – Cryptocurrency in the spotlight with the Senate Committee – Taxation
To print this article, simply register or connect to Mondaq.com.
Cryptocurrency (“Crypto“), a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain, is not a new concept. It has been more than a decade since the first decentralized crypto was released as bitcoin Yet crypto remains an elusive concept that is alien to many – despite the fact that 25% of Australians have ever owned or currently hold Crypto, making Australia one of the largest per capita users of this digital currency which has a global market totaling billions of dollars.1
The Australian tax office (“ATO“) also acknowledged that there is a widespread misunderstanding regarding the tax implications of investing in crypto, particularly among retail investors.2
It is against this background that the Australian Senate Select Committee on Australia as a Technology and Financial Center (“Senate committee“) looked at crypto and regulatory reform. The Senate committee acknowledged that while other countries have moved forward in their attempts to create regulatory frameworks to provide participants with certainty and consumer protection, the Australia has yet to put in place a regulatory system suitable for this new technology sector. 3
Senate Committee Final Report
On October 20, 2021, the Senate Committee tabled its third and final report to Parliament (“Final report“), which sets out 12 reform recommendations, including a recommendation on taxation.
In this article, we take a look at the Senate Committee’s tax recommendation and the current Australian Crypto tax landscape.
Senate Committee tax recommendation
The Senate Committee recommended that the capital gains tax (“CGT“) be amended so that transactions in digital assets only create a CGT event when they actually result in a clearly definable gain or loss.4 This may require the creation of a new class of CGT assets or events allowing the application of specific concessions or exemptions.5
The Senate committee also indicated that the Treasury and the ATO may need to work proactively with industry to develop relevant changes and provide clarification to industry, including ensuring that guidance from the ATO are updated at least every six months to keep pace with new technological developments.6
Current crypto fiscal landscape
In order to appreciate the Senate committee’s tax recommendation, it is necessary to examine the current Australian crypto tax landscape. We provide a high level overview below:
- The ATO’s view since 2014 is that crypto is not a “foreign currency” for income tax purposes, as it is not a legally recognized currency and adopted under the laws of Canada. ‘a country as a monetary unit and a means of fulfilling monetary obligations for transactions and payments. However, the question arises as to whether this view can be sustained as Crypto continues its meteoric rise and use at a speed that the Senate committee said has surprised governments, regulators and policymakers.7
- The ATO’s view is that Crypto is a CGT asset, noting that a CGT asset is defined to include any type of property or legal or fair right that is not a property.8
- As Crypto is a CGT asset, a taxpayer who owns Crypto in equity may be subject to income tax if a CGT event occurs and a capital gain occurs. This can happen in any of the following circumstances:
- sell or offer Crypto;
- trading or exchanging Crypto (including the transfer of Crypto for another Crypto);
- convert Crypto to fiat currency (i.e. a government issued currency such as the Australian dollar); Where
- use Crypto to obtain goods or services. 9
- In the event of a capital gain, the taxable capital gain may be reduced by the CGT discount of 50%. If a capital loss occurs, it can be used to offset future gains.
- Crypto that is held or used primarily to purchase goods and services for personal use (e.g. clothing, food, or pay personal bills) may not be subject to CGT on the basis of the ‘exemption of assets. for personal use ”.ten
- If a taxpayer holds Crypto in an income account – which can happen if he regularly trades Crypto or operates a business that trades in Crypto – any gain from Crypto is taxable as ordinary income.11 The 50% CGT discount does not apply to reduce the win.
The ATO monitors whether taxpayers correctly report Crypto gains and losses through a data matching program to collect Crypto transaction details from Australia-based Crypto exchanges and through the use of AUSTRAC.12 and IFTI13 reports to detect cash inflows and outflows.
When Can Crypto’s Tax Treatment Become Uncertain?
Crypto’s current tax treatment is based on existing tax laws, including CGT provisions which are now over 30 years old. The interaction of these existing tax laws with new technology in Crypto can lead to a certain degree of “incompatibility” in crypto-to-crypto transactions. It cannot be assumed that Crypto is identical to traditional assets, such as real estate and stocks.
An example of where this can happen is where a coin or token interacts with a protocol and the crypto is burned, staked, or traded. This may result in a CGT event, even though the interaction is a feature of the technology and does not give rise to a gain or an interest in the asset. The consequence is that the user who tries to interact with the protocol in order to benefit from the public service can not only trigger a CGT event, but also reset the acquisition date of the CGT asset for the purpose of determining eligibility to the CGT of 50%. reduction.14
Other examples mentioned in the final report include:
- an exchange of coins or tokens due to an upgrade or replacement of the underlying blockchain, for example when a digital token is replaced by another at a predetermined rate, and the original token is discarded rather than exchanged;
- using a crypto (eg bitcoin or ether) to purchase a non-fungible token (NFT);
- packaging of coins or tokens, i.e. wETH and ETH; and
- deposit or lend Crypto to an interest-bearing account.
One possible solution is to remove the CGT tax point for crypto-to-crypto transactions, so CGT should only be applied when digital assets are exchanged for fiat currency or similar currency. The Senate committee said this could dramatically simplify the CGT rules, but warned that it could lead to tax revenue leakage in cases where large crypto-to-crypto transactions occur in a way that clearly generates a capital advantage. definable.15
What Can You Do If You Have Crypto?
The final report presents a recommendation for tax reform of CGT provisions for the purpose of dealing with crypto, in particular crypto-to-crypto transactions. It also highlights the challenge for the ATO to provide regular and current advice to keep pace with new Crypto technology developments. However, until a new tax reform is implemented, existing tax laws apply.
Taxpayers holding Crypto should be careful in considering relevant tax implications, including correctly reporting Crypto-derived gains, keeping in mind that the ATO uses data matching to monitor tax compliance and is aware widespread misunderstanding over the tax treatment of Crypto.
Taxpayers cannot simply assume that any gain derived from Crypto is not taxable income (especially in the simpler cases of buying, holding and selling the same Crypto for a substantial gain) and that the transaction will not will not be detected by the ATO.
It will also be prudent to keep records to support the tax position, as with any acquisition and disposal of shares or real estate.
In more complex cases, the question arises as to whether it would be useful to obtain a binding private decision from the ATO to confirm the tax treatment.
1 Final Report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021 at page ix.
2 Final Report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021 at page 64.
3 Final Report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021 at page ix.
4 Recommendation 6 in the final report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021.
5 Final Report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021 at page 140.
7 Final Report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021 at page ix.
8 See TD 2014/26 Tax Determination.
9 ATO, “Transacting with Cryptocurrency” (last consulted on October 27, 2021) https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?anchor=Transactingwithcryptocurrency
12 Australian Center for Transaction Analysis and Reporting.
13 International funds transfer instruction.
14 This is taken from FinTech Australia’s submissions to the Senate committee. Currently, the ATO has issued guidelines on crypto staking and argues that rewards received from staking can be assessed as ordinary income. ATO, “Transacting with Cryptocurrency” (last consulted on October 27, 2021) https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?anchor=Transactingwithcryptocurrency
15 Final Report, The Senate – Special Committee on Australia as a Technology and Financial Center, October 2021 at page 140.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.