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 over a decade since the first decentralised Crypto was released in the form of bitcoin. Yet Crypto remains an elusive concept that is foreign to many — notwithstanding that 25% of Australians have either previously held or currently hold Crypto and this makes Australia one of the biggest adopters on a per capita basis of this digital currency that has a global market totaling trillions of dollars.[1]

The Australian Tax Office (“ATO”) has also acknowledged that there is widespread misunderstanding around the tax implications of investing in Crypto, particularly among retail investors.[2]

It is in this context that the Australian Senate’s Select Committee on Australia as a Technology and Financial Centre (“Senate Committee”) considered Crypto and regulatory reform. The Senate Committee acknowledged that whilst other countries have moved forward in attempting to create regulatory frameworks to provide participants with certainty and consumer protections, Australia has yet to introduce a fit-for-purpose regulatory system for this emerging technology sector. [3]

Senate Committee’s Final Report

On 20 October 2021, the Senate Committee tabled its third and final report to Parliament (“Final Report”), which sets out 12 recommendations of reform, including one recommendation relating to tax.

In this article, we consider the Senate Committee’s tax recommendation and the current Australian tax landscape on Crypto.

Senate Committee’s Tax Recommendation

The Senate Committee recommended that the capital gains tax (“CGT”) regime be amended so that digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.[4]  This may require the creation of a new CGT asset or event class that enables specific concessions or exemptions to be applied.[5]

The Senate Committee also indicated that Treasury and the ATO may need to proactively work with industry to develop relevant changes and provide clarity to the industry, including by ensuring that ATO guidance is updated at least every six months to keep pace with new technology developments.[6]

Current Crypto tax landscape

In order to appreciate the Senate Committee’s tax recommendation, it is necessary to consider the current Australian tax landscape relating to Crypto.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 because it is not a currency that is legally recognised and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for transactions and payments.  There is, however, a question on whether this view can be maintained as Crypto continues its meteoric rise and usage at a speed that the Senate Committee admitted has surprised governments, regulators, and policy makers.[7]
• The ATO’s view is that Crypto is a CGT asset, noting that a CGT asset is defined to include any kind of property or a legal or equitable right that is not property.[8]
• As Crypto is a CGT asset, a taxpayer who holds Crypto on capital account can be subject to income tax if a CGT event happens and a capital gain arises.  This can happen in one of the following circumstances:
  –  selling or gifting Crypto;
  –  trading or exchanging Crypto (including disposing Crypto for another Crypto);
  –  converting Crypto to fiat currency (i.e. a government issued currency such as Australian dollars); or
  –  using Crypto to obtain goods or services. [9]
• If a capital gain arises, the taxable gain may be reduced by the 50% CGT discount. If a capital loss arises, this may be used to offset against future gains.
• Crypto that is kept or used mainly to buy goods and services for personal use (e.g. clothes, food or paying personal bills) may not be subject to CGT on the basis of the ‘personal use asset exemption’.[10]
• If a taxpayer holds Crypto on revenue account — which can happen if they trade Crypto on a regular basis or operate a business trading in Crypto — any gain from Crypto is assessable as ordinary income.[11]  The 50% CGT discount does not apply to reduce the gain.

The ATO is monitoring whether taxpayers are correctly reporting gains and losses from Crypto through a data-matching program to collect details of Crypto transactions from Australian based Crypto exchanges and through use of AUSTRAC[12] and the IFTI[13] reports to detect incoming and outgoing of funds.

When can the tax treatment of Crypto become uncertain?

The current tax treatment of Crypto is based on existing tax laws, including the CGT provisions that are now over 30 years old. The interaction of these existing tax laws with a new technology in Crypto can lead to a degree of ‘incompatibility’ in crypto-to-crypto transactions. It cannot be assumed that Crypto is the same as traditional assets, such as real property and shares.

An example of where this may occur is where a coin or token interacts with a protocol and the Crypto is burned, staked or exchanged. This can result in a CGT event, notwithstanding that the interaction is a feature of the technology and does not give rise to a gain or right to the asset. The consequence is that the user who is trying to interact with the protocol in order to gain the benefit of the utility may not only trigger a CGT event but also reset the acquisition date of the CGT asset for purposes of determining eligibility to the 50% CGT discount.[14]

Other examples mentioned in the Final Report include:

• a coin or token swap due to the underlying blockchain being upgraded or replaced, such as where one digital token is replaced for another at a predetermined rate, and the original token gets discarded rather than traded;
• use of a Crypto (e.g. bitcoin or ether) to purchase a non-fungible token (NFT);
• coin or token wrapping, i.e. wETH and ETH; and
• depositing or lending Crypto to an interest-bearing account.

A possible solution is to remove the CGT taxing point for crypto-to-crypto transactions, such that CGT should only be applied where the digital assets are traded for a fiat currency or similar currency. The Senate Committee indicated that this may simplify the CGT rules considerably but warned that this may risk leakage of tax revenue in cases where significant crypto-to-crypto transactions are occurring in ways that accrue a clearly definable capital benefit.[15]

What can you do if you are holding Crypto? 

The Final Report puts forward a recommendation for tax reform to the CGT provisions for purposes of dealing with Crypto, particularly crypto-to-crypto transactions. It also highlights the challenge for the ATO to provide regular and current guidance to keep pace with the new Crypto technological developments. Until further tax reform is implemented, however, the existing tax laws have application.

Taxpayers holding Crypto must be prudent in considering the relevant tax implications, including by correctly reporting gains derived from Crypto, bearing in mind that the ATO is using data-matching to monitor tax compliance and is aware of widespread misunderstanding on the tax treatment of Crypto.

Taxpayers cannot simply assume that any gain derived from Crypto is not assessable income (particularly in simpler cases of buying, holding and selling the same Crypto for a substantial gain) and that the transaction will not be detected by the ATO.

It will also be prudent to maintain records to support the tax position — similar to any acquisitions and disposals of shares or real property.

In more complex cases, there is a question whether it would be worthwhile to obtain a private binding ruling from the ATO to confirm the tax treatment.

If you are uncertain about your Crypto tax treatment, please contact us for a discussion.