Crypto assets — tax amendment proposed and current ATO guidance
Although cryptocurrency pricing has been somewhat of a rollercoaster ride, with recent drops in value potentially leading to substantial losses (at most on paper) for some and Tax Time 2022 approaching, it is timely to consider the implications of crypto tax.
The Australian tax position
Although cryptocurrency’s name includes the word “currency”, it is not considered Currency in Australia or most other countries.
Australia doesn’t have a crypto-specific tax system. Tax practitioners, taxpayers, and the ATO must follow existing laws for specific transactions involving cryptocurrency.
The legislative change proposed to give certainty.
The Government has announced its intention to introduce Australia’s first cryptocurrency-specific tax law amendment.
On 22 June 2022, the Treasurer Dr. Jim Chalmers and the Assistant Treasurer Stephen Jones released media releases confirming that legislation will be introduced to clarify that cryptocurrency will not be included in foreign currency tax arrangements.
This release is in response to the September 2021 decision of the Government of El Salvador to adopt Bitcoin as legal tender. This could create uncertainty over the status of cryptocurrency assets like bitcoin for tax purposes here in Australia. Although this is the first step towards providing certainty, the legislative details remain to be released.
If it is clarified that crypto assets like bitcoin and Ethereum are not considered foreign currencies, how should they be handled for tax purposes?
Due to the absence of specific crypto-specific legislative rules, taxpayers and practitioners will continue relying on ATO guidance and interpretations.
ATO guidance
The ATO published a series of Taxation Determinations in 2014 that outlined the Commissioner’s views on various issues relating to Bitcoin (one of the most well-known and common cryptocurrencies).
- TD2014/25 — Whether bitcoin is a “foreign currency.”
- TD 2014/26 — Whether bitcoin is a CGT asset
- TD2014/27 — Whether bitcoin is trading stock
- TD2014/28 — FBT implications when an employer gives bitcoin to an employee
ATO also provides non-binding guidance regarding various types of crypto transactions.
The ATO updated its Currency — trading and gifting guidance in March 2022. This article will focus on the key points.
This guidance does not apply to cryptocurrency as an investment or personal asset. See other ATO webpages for cryptocurrency being used in business and other situations.
Cryptocurrency is a CGT asset.
The ATO will treat cryptocurrency held for investment purposes as shares or other investments. The ATO considers cryptocurrency a CGT asset, and its tax implications are similar to those of other CGT assets.
Several types of CGT events can be identified in cryptocurrency.
- It can be exchanged for fiat currency (e.g., USD or AUD)
- Exchanging one cryptocurrency for another cryptocurrency
- It can be gifted
- It can be traded
- It can be used to pay for goods and services.
Here is a summary of tax implications for those who engage in these transactions. A taxpayer can have multiple crypto assets that they use for different purposes. Individuals can trade crypto for business while holding crypto as a personal investment.
Crypto investors should be aware of the implications.
A taxpayer who is an investor buys cryptocurrency with the expectation that it will increase in value over time. Any gains will then be taxed as capital gains or losses if they don’t make money.
Each cryptocurrency will be considered a separate CGT asset. The CGT provisions will be invoked if the taxpayer disposes of one type of cryptocurrency to acquire another.
A taxpayer who has held the cryptocurrency for at least 12 months may be eligible to receive a discount of 50 CGT to reduce capital gains when they sell or exchange it. They can’t offset a capital loss if they suffer a capital loss in the current or future years.