The Bitcoin Rush: A taxing issue for pioneers

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 addressing some of the many questions that have been raised. However, these guidelines offer little assistance for early adopters of cryptocurrency who find themselves in a unique position.

Many early adopters mined and acquired cryptocurrency out of a genuine personal interest. With the value of cryptocurrencies, particularly Bitcoin, increasing, serious investors are entering the markets and many early adopters are selling their cryptocurrency.

Previous private binding rulings (PBRs) released by the ATO that supported favorable taxation outcomes for early adopters have recently been noted by the ATO as not supporting the Commissioner’s view. So, what now for early adopters?

Is a sale of cryptocurrency a capital gain?

  • In Taxation Determination 2014/26 (TD 2014/26) the Commissioner stated cryptocurrency is ‘property’ and therefore a capital gains tax (CGT) asset. The disposal of cryptocurrency will therefore give rise to a CGT event under the Income Tax Assessment Act 1997. 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.
  • However, CGT is not where all disposals of cryptocurrency fall.
  • Where profits are deemed to have a revenue nature the revenue rules contained in the tax legislation will take precedence over the CGT provisions. This may occur where the Commissioner deems the taxpayer, including early adopters, to be holding the assets as trading stock or deems profits to be the result of a sale of a commercial nature.
  • Considering the significant variances in tax liabilities depending on whether they are on capital or revenue account, early adopters need to carefully consider what their initial uses, intentions and purposes of acquiring the cryptocurrency were and whether this has changed over time.

Is the personal use asset exemption available to gains on the disposal of cryptocurrency?

  • “Personal use assets” are CGT assets acquired for less than $10,000 that are used or kept for the personal use or enjoyment. These assets may be exempt from CGT.
  • The Commissioner acknowledged in TD 2014/26 that where Bitcoin is kept or used for personal use and consumption, such as online purchases of clothing or music, then it may fall within this exemption.
  • This position has been supported in PBRs which allowed for the concession historically. However, we caution on this point as the PBRs are now noted as not reflecting the Commissioner’s current view. Whilst the extent to which they do not reflect the Commissioner’s view is uncertain, matters should be considered on a case by case basis.

What now?

  • The insufficient guidelines and absence of case law on this area of tax leaves early adopters of cryptocurrencies in great uncertainty. As the tax treatment of cryptocurrencies will play an even greater role in the future, we await further comments from the Commissioner.
  • Taxpayers may seek a private binding ruling (PBR) from the Commissioner to attain some certainty around the position taken. However, whilst the Commissioner’s position remains uncertain taxpayers may not wish to take this avenue. In the meantime, taxpayers can 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 transactions, PBRs or RAPs or for general business law advice, please contact:

    Laura Spencer
    Sladen Legal
    T +61 3 9611 0110
    Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

    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