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).
The Federal Commissioner of Taxation (Commissioner) recently updated his guidelines on cryptocurrency and for the first time addressed the taxation of cryptocurrency acquired as the result of a chain split.
The most notable chain split to happen to date was when Bitcoin forked in August 2017, creating Bitcoin Cash. Miners of Bitcoin were reported to be frustrated by the scaling of Bitcoin and as a result created Bitcoin Cash as a fork off the main Bitcoin blockchain. The new Bitcoin Cash is an alt-coin and is on a new blockchain. Individuals holding Bitcoin were able to access Bitcoin Cash equal to the Bitcoins they held.
With cryptocurrency determined by the Commissioner to be a CGT asset, what are the implications of receiving new cryptocurrency as the result of a chain split?
The Commissioner has stated that you do not derive ordinary income or make a capital gain when receiving new cryptocurrency as a result of a chain split. However, there will be implications for subsequent trades, conversions or disposals of that new cryptocurrency.
Whilst costs may have been incurred in acquiring the original cryptocurrency, for example the purchase price, this cost is not apportioned across the new cryptocurrencies acquired as a result of a chain split. Despite needing the original cryptocurrency to access the new cryptocurrency created as a result of the fork, the new cryptocurrency will have no acquisition cost. Therefore, when working out your capital gain on a later disposal of the new cryptocurrency the acquisition cost will be zero.
Consideration should be given to other costs incurred in relation to the asset which may be added to its cost base to reduce any resulting capital gain. Further, simply because the new cryptocurrency was acquired at no cost, does not prevent profits from later disposals being deemed to be trading or commercial profits on revenue account. The Commissioner may, based on a number of factors contained in taxation law, deem the profits from disposals of the new cryptocurrency to be revenue in nature. Where profits are deemed to have a revenue nature the revenue rules contained in the tax legislation will take precedence and the resulting tax liabilities will be pointedly different.
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.
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
