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).
Taxation of cryptocurrency continues to gain substantial attention in the media. Our thoughts on the implications of having a commercial nature when acquiring and selling cryptocurrency and the general uncertainty around taxation of cryptocurrency were recently shared in Forbes.
An area of cryptocurrency dealings which, unlike many areas, has certainty in the tax treatment is when exchanging from one cryptocurrency to another. However, it is proving to be an area of confusion for many early adopters, miners, hobbyists and investors who are under the impression that these transactions are tax-free.
In Taxation Determination 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. CGT is paid on the proceeds received from the disposal of the cryptocurrency less it’s cost base.
But what if you exchange your cryptocurrency for another cryptocurrency and therefore receive no cash proceeds?
In this circumstance you dispose of one CGT asset and acquire another. However simply because you receive property instead of money does not mean there will be no tax consequences.
In the absence of cash proceeds, the tax consequences will be determined either by the market value of the cryptocurrency received or the market value of the cryptocurrency disposed of, depending which is more appropriate. Where the market value exceeds the cost of the initial cryptocurrency there will be a gain which is liable for CGT.
For individuals and businesses who often exchange between cryptocurrencies, this can represent a significant number of CGT events in a tax year and potentially large CGT liabilities even where losses are later incurred.
Whilst this may spell bad news for people exchanging between cryptocurrencies who were under the impression that only conversion back into fiat currency was taxable, it’s not all doom and gloom. There are CGT concessions and exemptions which may be applied to reduce the gain. For example, if the cryptocurrency was acquired as a capital asset to be held for long-term investment, then holding the CGT asset for more than 12 months may yield a 50% tax concession. Consideration should be given to both your circumstances and the specific factors of each concession or exemption to determine if the CGT liability may be reduced.
Ultimately, it is recommended that taxpayers keep track of the time and date of any transactions made as this will be a critical factor in determining their applicable taxation liabilities, reductions and exemptions.
For more information on cryptocurrency transactions 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
