Taxation of Cryptocurrency in Australia
Cryptocurrencies and blockchain technology represent an exciting wave of a new technology and, as their use becomes more widespread, tax advisers and the Australian Taxation Office (ATO) need to consider how to apply legislation which was not designed for the application of this new technology.
Application of Tax Principles to Cryptocurrency
Despite being a new asset class, the cryptocurrency market has rapidly evolved and so have the types of cryptocurrencies and their uses.
There are many types of cryptocurrencies, with the main categories being:
- Utility Tokens;
- Asset Tokens; and
- Security Tokens.
As with established tax principles, how a taxpayer will be subject to tax on any cryptocurrency transactions will be based upon the particular facts and circumstances relevant to the acquisition by the taxpayer, with the following categories likely to be applicable:
- Carrying on a business – where a taxpayer is regularly trading in and out of cryptocurrencies in a business-like manner, they will likely be considered to be carrying on a business and any profits or losses will be assessable/deductible when realised.
- Acquired for the purpose of disposing at a profit – again this should mean that any profits/losses will be assessable/deductible when realised.
- Acquired for the purpose of a long-term investment – this should mean that any profits/losses will be taxable on capital account with the potential to access the CGT discount if the asset is held by a qualifying person (individual, trustee or superannuation) for at least 12 months.
- Personal use assets – where a cryptocurrency is acquired and used mainly to purchase items for personal use or consumption then the cryptocurrency may be considered a personal use asset. In this case, if acquired for less than $10,000 any gain can be disregarded. Personal use assets cannot give rise to losses.
Please note that it is likely that a transfer between cryptocurrencies will trigger a need to determine a gain/loss for tax purposes (not just at the time the cryptocurrency is converted back into fiat currency).
With the Australian Tax System being a self-assessment system, ultimately it is up to the taxpayer to make sure they have contemporaneous records for any position adopted in their tax returns.
At a high level, taxpayers should record the acquisition and sale price of any cryptocurrencies sold.
Where a cryptocurrency has multiple uses (such as a utility token), taxpayers should record details such as their intention at the time of acquiring the cryptocurrency or any subsequent change of intention as in the absence of sufficient contemporaneous records, the taxpayer’s behaviour may be used as objective evidence to determine appropriate tax treatment.
With the above in mind, taxpayers should also record details such as:
- Their intention to hold for the mid to longer term, which may indicate the cryptocurrency is held as an investment on capital account;
- Any change of intention which results in the cryptocurrency being disposed of within a shorter period than previously expected; and
- Whether a first-in-first-out or other specific methods are appropriate to calculate gains and losses on cryptocurrency.
Finally, where there may be doubt in respect of a taxpayer’s particular circumstances, it is also possible to approach the ATO for a private binding ruling where the ATO can analyse a fact pattern or set of transactions and provide guidance as to the expected tax treatment.