Australian tax rules relating to cryptoassets remain in their infancy, comprising largely of antiquated rules for fiat currency transactions, with impractical attempts at guidance from revenue authorities. This practical guide summarises the Australian tax issues for some typical cryptoasset transactions. In this innovative sector, no two transactions are the same.
You should seek timely tax and other advice specific to your circumstances.
Initial coin offerings (ICO)
The issuer of a cryptoasset (Issuer) creates the cryptoasset and issues it to investors (Investors).
An Issuer that is resident in, or has some other jurisdictional nexus with, Australia will likely be taxable on ICO proceeds.
A cryptoasset could give the Investors an equity interest in the Issuer, depending on the nature of the rights attached to it. In this situation, the ICO proceeds would not be taxable, but all future returns to the holders of the cryptoasset would be treated as dividends, which could be an undesirable outcome.
The Issuer’s income from fees charged on the use or trade of cryptoassets are likely to be taxable to the Issuer.
If the Issuer is registered for GST, GST will be payable on the issue of the cryptoasset. If the Issuer is not registered for GST, the issue of the cryptoasset could cause the Issuer to become registered for GST if the ICO proceeds are $75,000 or more.
Investors in the business of trading cryptoassets are likely to be subject to the trading stock provisions, much like a supermarket treats its goods for sale as trading stock. The gain on the sale of cryptoassets will be taxable to such investors.
Otherwise, the cryptoasset will likely be a Capital Gains Tax (CGT) asset. The gain on its disposal will be subject to CGT. Capital gains may be discounted under the CGT discount provisions, so long as the Investor satisfies the conditions for the discount.
Although under the GST law, the Issuer will be liable to remit the GST on the ICO proceeds, it is likely that the Issuer will contractually pass on its GST liability to the Investors via a grossed up issue price.
Investment funds, including venture capital and other private equity funds, (Funds) purchase cryptoassets as an investment asset.
The nature of the Fund dictates the tax treatment of investing in cryptoasset. Apart from circumstances where the asset is an equity interest in the Issuer, it is likely to be treated as a revenue asset for most Funds, with some Funds (such as managed investment trusts (MIT)) capable of treating it as a capital asset.
Most Fund structures in Australia are flow through vehicles; investors in the Funds, rather than the Funds themselves, will be subject to tax on the gains.
Although under the GST law, the Issuer/transferor will be liable to remit any GST on the supply of the cryptoasset to the Fund, it is likely that the Issuer/transferor will contractually pass on that GST liability to the Fund via a grossed up price. This assumes that the Fund will use cash (and not other any other property) to purchase the cryptoasset.
Fund investors will generally be taxable on their share of the Fund’s gains from cryptoasset, with the same character as the gain for the Fund. Revenue gains are not eligible for the CGT discount, whereas capital gains may be eligible for the CGT discount.
Foreign fund investors in MITs may be subject to a withholding tax on distributions of the gains made by the Fund.
No GST should be payable on the acquisition of interests in the Funds but it is likely that the price for those interests will take into account the GST contractually payable by the Fund on its acquisition of the cryptoassets.
Some crytoassets are beginning to be used widely as a medium of exchange (ie a “cryptocurrency”)
A person who pays for a good or service in cryptocurrency (whether for business or private purposes) is likely to be taken to dispose of cryptocurrency and, in that process, may make a gain or loss on that cryptocurrency.
A person who pays the cryptocurrency for business purposes (for example, a small business purchasing technology services by paying Bitcoin) should be able to deduct the value of the cryptocurrency paid.
Other payers (for example, an individual who purchases software using Ethereum for personal use) should not be entitled to a deduction.
No GST will be payable by the payer on the purchase of any goods or services using cryptocurrency because in these circumstances the cryptocurrency is treated as the equivalent of money.
A person who receives cryptocurrency in exchange for a good or service provided should be taxable on the value of the cryptocurrency received if that person is engaged in a business. The person will also be taken to have acquired cryptocurrency, which may be acquired as a capital asset or trading stock (see the “Investors” section).
Other recipients should be taken to have acquired a capital asset.
Depending on the nature of the goods or services, GST may be payable by the payee on the supply of such goods or services where cryptocurrency is provided as the consideration for that supply. The GST treatment is the same as if money was provided as the consideration.
Initial Coin Offerings Where to ‘set up shop’
You are getting ready to undertake an ICO. But where should you set up?
Why does it matter?
It matters in respect of regulations, tax and convenience.
If the Issuer is Australian, it will be subject to Australian regulations and tax.
If the cryptoasset is a financial product, you will likely be subject to Australian securities regulation and financial services licensing requirements, unless you can rely on an exemption.
Also, the Issuer may become required to be registered for GST.
If the Issuer is foreign, it will be subject to the regulations and tax of that jurisdiction.
This may result in some licensing requirements and obligations under securities laws of that other jurisdiction, as well as Australia if that is where you wish to offer the ICO.
In some cases, the Issuer’s proceeds may also be subject to Australian tax (for example, under Australia’s Controlled Foreign Company (CFC) rules). For a “vanilla” ICO, the ICO proceeds should not be subject to Australian tax under the CFC rules. However, other profits might be (depending on the arrangement).
Also, the Issuer (in the same manner as resident Issuers) may become required to be registered for GST.
How do I set-up offshore?
By incorporating an entity offshore and making decisions offshore.
Generally, a company must have its “central management and control” in a country to be a tax resident of that country. It is not as simple as just incorporating there – it needs to be managed from there! It is also important that no-one negotiates binding contracts, or operates from a “fixed place of business” (such as an office space), in another jurisdiction. This must be viable and practical in order for you to consider “setting up shop” overseas (consider costs, convenience, and practicality).
If an offshore entity is viable, you will need to consider regulatory issues. If the token is a financial product that you intend to offer in Australia, you may need to comply with securities regulation and financial services licensing requirements, or rely on an exemption.
As to which jurisdiction – the world is your oyster, however some jurisdictions are receptive to the conduct of ICOs, while others have banned ICOs. We can help you work through this.
Jurisdictions with which Australia does not have a double tax treaty can be problematic, as Australia typically has greater taxing powers in respect of income generated from those jurisdictions. Care should be taken.
Being an Australian entity
- This is the default option from a tax perspective if “central management and control” is located in Australia.
- If the token is a financial product, then you are subject to Australian securities regulations, complying with certain licensing requirements and ASIC oversight.
- Generally a “safe” jurisdiction for investors (unlike certain havens which may make investors nervous).
- Profits and proceeds from the ICO will be subject to Australian tax.
- May become required to be registered for GST.
Being a foreign entity
- Potentially friendlier securities regulation. However, some jurisdictions “friendly” to ICOs have similar regulatory regimes to Australia and some jurisdictions have banned ICOs.
- Potentially more complex with increased operating costs.
- Potentially lower tax.
- For the Issuer, tax is likely to apply in the country in which it is a tax resident (the base and rate of tax may be lower than in Australia).
- For Australian owners, the proceeds of the Issuer may still be subject to Australian tax (unless the coins carry vanilla terms – in which case profits are generally taxed in Australia when returned as a dividend).
- May become required to be registered for GST even though the Issuer is a foreign entity.