For the purpose of this article “cryptocurrency” refers to all digital currency assets including, but not limited to, Bitcoin (BTC) and altcoins including Bitcoin Cash (BTH), Ripple (XRP), NEM, Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Dash (DASH), Monero (XMR) and Z Cash (ZEC).
Interest in topical areas of taxation law generally peaks around the end of financial year when taxpayers start to consider the implications of these laws when preparing their tax returns. The taxation of Bitcoin and other cryptocurrencies is one topical area of taxation law garnering significant attention at the moment.
With this in mind, the Federal Commissioner of Taxation (Commissioner) has included various updates to his guidelines regarding the appropriate taxation treatment of cryptocurrency. However, the Commissioner’s guidance is somewhat incomplete and with no case law on point there are many questions remaining.
Sladen Legal has received various enquires regarding this area of taxation law including from the media who have picked up on the significant implications this area of law presents. We recently spoke with the Australian Financial Review on two articles in this space (see: “Own Bitcoin or Other Cryptocurrency – the ATO is after you” and “There’s nowhere to hide on crypto says ATO”
For investors looking to capitalize on the cryptocurrency boom some may believe the taxation treatment is clear. However this is not the case.
In Taxation Determination 2014/26 the Commissioner explained his view on cryptocurrency and stated that it is neither money nor a foreign or Australian currency but rather it is ‘property’ and therefore a capital gains tax (CGT) asset.
The disposal of cryptocurrency will give rise to a CGT event under the Income Tax Assessment Act 1997. Examples of disposals include the sale, trade or exchange of the cryptocurrencies for other cryptocurrencies, services or products and the conversion of the cryptocurrency to fiat currencies such as Australian or United States dollars.
Where taxpayers fall within the realms of CGT, consideration should be given to a number of concessions that may be available to reduce any capital gains tax liability, such as where the asset has been held for 12 months or the investment is through a small business.
However, CGT is not where all disposals of cryptocurrency fall. Rather, where profits are deemed to have a revenue nature the revenue rules contained in the tax legislation will take precedence. This may arise where the Commissioner, based on a number of factors outlined in taxation law, deems the investor to be holding the assets as trading stock. Further, the revenue rules may also be triggered in relation to one individual sale where that sale has a commercial nature. Again, the Commissioner will consider a number of factors to determine this.
Considering the significant variances in liabilities which can arise as a result of these different tax treatments, taxpayers should carefully consider their position and the appropriate treatment. This will include looking at how and why the cryptocurrency was acquired, the length it was held, any changes in use or intention and motivations for sale.
Taxpayers may wish to seek a private binding ruling (PBR) from the Commissioner to attain certainty around the tax position they should take in respect of their cryptocurrency disposals. Alternatively, considering the general uncertainty in the ATO’s view on the point at this stage, taxpayers may instead seek to establish a reasonably arguable position (RAP) in relation to how they treat the disposal for tax purposes. Where a RAP is established taxpayers will not become liable to administrative penalties on the unpaid tax shortfall amount where the interpretation of the relevant taxing provisions is subsequently found to be incorrect.
For more information on cryptocurrency and taxation or for general business law advice, please contact:
Laura Spencer
Associate
Sladen Legal
T +61 3 9611 0110
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
lspencer@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
Sladen Legal
M +61 411 319 327 | T +61 3 9611 0105
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia
dsmedley@sladen.com.au
