Further to our recent alert concerning the government’s announcement to continue its work to reform the regulation of crypto assets generally under Australian law , the Board of Taxation last month commenced its consultation into the Review of the Tax Treatment of Digital Assets and Transactions in Australia1, identifying specific questions for consultation in the accompanying Consultation Guide, including those relating to:
- the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
- the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
- the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
- the taxation of digital assets and transactions in comparative jurisdictions and considering how international experience may inform the taxation of digital assets and transactions in Australia; and
- whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.
The Board’s consultation has been much anticipated. According to the ATO, more than 800,000 Australian taxpayers have transacted in digital assets in the last three years, with a 63% increase in 2021 compared with 2020.2
Types of crypto assets and uses
In today’s market, crypto assets have three primary uses:
- as an investment;
- as a means of exchange; and
- to access goods and services.
Crypto assets include (but are not limited to) cryptocurrencies such as Bitcoin and Litecoin, utility tokens such as Filecoin, and security tokens. They may run on their own blockchain or use an existing platform like Ethereum. Crypto assets also include non-fungible tokens (NFTs).
Associated tax policy issues
A widely accepted principle for taxation is that profits should be taxed where the value is created. However, with respect to crypto assets, uncertainties arise in relation to the following tax policy issues:
- Where to tax? (nexus) – What are the taxing rights in a country where entities transact using crypto assets;
- What to tax? (value creation) – How to attribute profit (and recognise losses) with respect to these crypto assets; and
- When to tax? (triggering of taxable events) – Whether the creation, transacting and/or processing of crypto assets triggers a taxing point.
The creation, trade and use of crypto assets is in an ongoing state of evolution, and the Board states that it is important to ensure that the tax framework remains appropriate. The tax treatment of some aspects of these assets may be viewed as uncertain and unclear, not only in Australia, but in comparable jurisdictions.
Disposing of cryptocurrencies in Australia
Based on current ATO guidance, many individual taxpayers will have acquired cryptocurrencies mainly as an investment (where such individuals acquire and hold cryptocurrencies to make a financial profit from holding or disposing of them).3
As a general rule for investors, the ATO states that such cryptocurrencies are taxed under the CGT regime as CGT assets, such that if there is a “CGT event”, those individuals may make either a capital gain or capital loss on the disposal of the cryptocurrency.
In this regard, on 22 June 2022, the Treasurer and Assistant Treasurer announced that legislation to be enacted will confirm the position contained in current ATO guidance that cryptocurrencies are not “foreign currency” for Australian tax purposes. This follows the decision by the Government of El Salvador to allow Bitcoin as legal tender of that country.4
What constitutes a disposal of cryptocurrency for CGT purposes?
The ATO’s guidance provides that a transaction involving a CGT disposal of cryptocurrency takes place when the individual:
- sells a crypto asset
- gifts a crypto asset
- trades, exchanges or swaps a crypto asset for another crypto asset
- converts a crypto asset to Australian or foreign currency (otherwise known as 'fiat currency')
- buys goods or services with a crypto asset.
This means that while individuals making capital gains made from the disposal of crypto investments held for more than 12 months can benefit from the 50% CGT discount, capital losses made on a disposal can only be used to shelter other capital gains.
At the time of writing, the two largest cryptos – Bitcoin and Ethereum – are sitting nearly 50% below the all-time highs they reached in November 2021. Given the marked increase in acquisition of such cryptos by Australians (including young Australians in particular 5 ) in 2021 next to previous years, this suggests that many will have realised significant capital losses, or be sitting on large unrealised capital losses – that can only be applied against capital gains (once realised).
Treatment of disposal of cryptocurrencies in other jurisdictions
One of the consultation questions put by the Board of Taxation relates to the lessons that can be drawn from the taxation of crypto assets in other comparable jurisdictions, including novel ways of taxing these transactions.
On 12 October 2020, the OECD released its report Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, which analyses the emerging issues related to the taxation of virtual currencies.
Some key variations from the current Australian tax treatment are given below.
- A small number of countries do not consider any exchanges made by individuals to be a taxable event for the holder of the virtual currency, including Grenada, Italy, The Netherlands, Portugal and Switzerland.
- A small number of countries do not consider exchanges from one cryptocurrency into another to be taxable, including Chile, France, Latvia and Poland. The rationale for excluding these transactions may be either pragmatic in nature to avoid difficulties in establishing the fiat currency value of a trade happening entirely between two virtual currencies, where the fiat currency value may be hard to assess; or part of a broader strategy to encourage trading in virtual currencies by providing tax consequences only when an exchange happens with fiat currency or a good or service.
- In Korea, lawmakers have proposed an exemption for the first KRW 2.5 million of crypto gains (AUD 2,700) from tax.
Interestingly, although not touched upon in the OECD report, while neither Singapore nor New Zealand have capital gains tax regimes, Singapore exempts crypto gains made by investors from tax, while New Zealand doesn’t (at least in the guidance provided by its revenue authority) classify such gains as more akin to ordinary income or commercial profits.6
Timeline for consultation and reporting
This survey of comparable jurisdictions and supporting submissions will, along with responses to the other questions posed in the Consultation Guide, inform what changes, if any, the Board of Taxation recommends the Government should make to our taxation laws.
Submissions are being received until 30 September, with the Board of Taxation due to report to the Government by 31 December 2022.
If you would like further information or to discuss your own circumstances, please contact our Taxation and Digital Assets teams.
1. https://taxboard.gov.au/review/digital-assets-transactions-aus
2. Crypto asset secondary service providers: Licensing and custody requirements – Treasury Consultation Paper 21 March 2022 at page 2, accessed on 2 September 2022 at https://treasury.gov.au/consultation/c2022-259046
3. https://www.ato.gov.au/individuals/Investments-and-assets/crypto-asset-investments/what-are-crypto-assets-/ accessed on 2 September 2022
4. https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/crypto-not-taxed-foreign-currency
5. Roy Morgan Single Source 14 April 2022 Finding No. 333333, accessed on 2 September 2022 at https://www.roymorgan.com/findings/333333-%208929-cryptocurrency-february-2022%20(1)-202204140501
6. https://www.ird.govt.nz/cryptoassets/individual/buying-selling Accessed 2 September 2022