On 29 June 2018, the ATO updated the information on its website dealing with the taxation of transactions involving cryptocurrency. By way of context, the ATO has previously determined that cryptocurrency is a CGT asset for the purposes of the Capital Gains Tax (CGT) regime.
The ATO website now provides guidance about each of the following topics on a separate webpage:
- transacting with cryptocurrency
- cryptocurrency in business
- record keeping and
- additional information.
While the additional guidance from the ATO is likely to be welcomed by taxpayers and the cryptocurrency community, a number of concerns remain.
Specifically, the ATO appears to have taken a binary view of the taxation of cryptocurrency which largely ignores taxpayers who have acquired cryptocurrency as part of a profit making undertaking or plan. That is, the ATO provides limited commentary on the circumstances in which cryptocurrency will be held in the course of carrying on a business (and therefore as trading stock), or as part of a profit making undertaking or plan (and therefore as a revenue asset, although possibly not trading stock).
Given that few mainstream cryptocurrencies offer a periodic return, as well as the recent meteoric rise and fall in prices, a question arises as to the circumstances in which it can be said that a taxpayer who has acquired cryptocurrency in recent times has not done so solely for speculative gain.
The ATO also appears to be taking a more narrow interpretation of the personal use asset exemption.
Transacting with cryptocurrency
The ATO states that taxpayers who acquire cryptocurrency as an ‘investment’ may make a capital gain on disposal. The ATO does not elaborate on the meaning of ‘investment’, or whether a cryptocurrency which does not offer a periodic return can be held as an ‘investment’.
In any event, the ATO website states that a CGT event will occur when a person disposes of their cryptocurrency, which would include the following situations:
- selling or gifting cryptocurrency
- trading or exchanging cryptocurrency for another item or for another cryptocurrency (for instance, trading Bitcoin for Ethereum)
- converting cryptocurrency into a fiat currency (such as Australian dollars) or
- using cryptocurrency to purchase goods or services.
A separate CGT event will occur on each occasion that a taxpayer deals with cryptocurrency in one of the above ways, or in any other way that would amount to a disposal of cryptocurrency for CGT purposes.
If the cryptocurrency is traded for another cryptocurrency or for another item that cannot be valued, the capital proceeds of the disposal are worked out using the market value of the cryptocurrency being disposed of at the time of the transaction.
The ATO website also elaborates on the tax treatment of the following situations which may arise in relation to cryptocurrency, where it is held as an ‘investment’:
- where new cryptocurrency received as a result of a chain split (also known as a ‘fork’ – such as Bitcoin Cash being received by Bitcoin holders), taxpayers do not derive ordinary income or make a capital gain at that time; rather, a capital gain will arise when it is disposed of (see above). In this case, the new cryptocurrency will have a nil cost base; or
- the taxpayer loses their cryptocurrency private key or loses their cryptocurrency due to theft, the taxpayer may be able to claim a capital loss if they have sufficient evidence to establish their ownership.
The ATO website also clarifies that, as a CGT asset, cryptocurrency will be subject to the other rules affecting CGT assets. For instance, taxpayers may be entitled to the CGT discount for assets held as an ‘investment’ for 12 months or more.
In respect of the personal use asset exemption, the ATO has taken the view that both ‘the period of holding and the nature of the subsequent transaction will be relevant to whether your cryptocurrency is a personal use asset’. The ATO has also stated that ‘the longer the period of time that a cryptocurrency is held, the less likely it is that it will be a personal use asset’.
This appears to reflect a more narrow interpretation from the ATO, and perhaps a departure from the views expressed by the Commissioner of Taxation in a number of private binding rulings on the topic.
Cryptocurrency in business
The ATO website commentary relating to cryptocurrency used in business is largely unchanged.
However, the ATO provides limited commentary on the circumstances in which cryptocurrency will be held in the course of carrying on a business (and therefore as trading stock), or as part of a profit making undertaking or plan (and therefore as a revenue asset, although possibly not trading stock).
In fact, the ATO website appears to suggest that taxpayers who have acquired cryptocurrency with an intention to make a profit (or with a genuine belief that they will do so), will hold their cryptocurrency as trading stock.
Prudently, the ATO recommends that taxpayers keep records of all transactions involving cryptocurrency, whether they are using cryptocurrency as an investment, for personal use or in business.
This page provides links to previously released Tax Determinations which relate to cryptocurrency and bitcoin.