The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 2): Australia
By Tony Nunes, Kelly + Partners Chartered Accountants
People were never clear what to make of the superhero, Superman. He looked and acted human, but came from another planet, and had these incredible superpowers. Similarly, the Australian Tax Offce (ATO) is split on its treatment of cryptocurrencies and on which tax rules to apply.
Crypto as property
In 2014, the ATO responded to the emergence of cryptocurrency by releasing guidance on its views of the taxation of Bitcoin and other cryptocurrencies that shared the same characteristics as Bitcoin.
According to the ATO’s view, Bitcoin is a capital gains tax (CGT) asset for income tax purposes. Thus taxpayers will make a capital gain or loss each time Bitcoin is disposed of.
The following two examples illustrate how the ATO’s guidance would be implemented:
- On 1 June 2017, Jane purchased five bitcoins for USD 6,000 (USD 1,200 for each bitcoin). On 1 November 2017, she used one bitcoin to buy USD 2,000 worth of merchandise via an online Australian-based retailer.
Jane should observe a USD 800 profit on the transaction (i.e. USD 2,000 minus USD 1,200). Her tax liability on the gain could be as high as USD 360 (If Jane had held the bitcoin for longer than a year, the CGT gain would be concessionally treated and the tax liability on the gain halved).
- Jane purchased four bitcoins on 2 February 2017 for USD 1,120 per bitcoin and three on 20 April 2017 for USD 1,990 per bitcoin. She exchanges her bitcoins as follows: 10 Ethereum coins on 10 March 2017 for USD 320 per coin, and 65 Litecoins on 5 July 2017 for USD 65 per coin.
Jane needs to keep track of the basis and sales price for each cryptocurrency transaction to accurately calculate the gain or loss for each one. In addition, if Jane purchased bitcoins at different dates and prices, at sale, she would have to decide whether to sell a specific bitcoin or use the first in, first out (FIFO) method to determine any potential gain or loss.
The ATO also noted in their guidance that when a taxpayer trades in bitcoin as part of their business, the Bitcoin is trading stock. Therefore, to the extent that a taxpayer is in the business of buying and selling bitcoin, any gains will be included in assessable income as ordinary income and not as a capital gain. The practical implementation of this distinction is, however, similar to the tax implications outlined in the above two examples.
As Bitcoin is a form of property, it has employment tax consequences where an employer provides bitcoin to an employee in respect of their employment. Per the ATO this is the provision of a property fringe benefit under the Fringe Benefits legislation, with the consequence that the employer of the employee would be liable to pay Fringe Benefits Tax on the taxable value of the bitcoin provided.
Crypto as currency
In a 2014 Goods and Services Tax (GST) public ruling, the ATO considered whether Bitcoin is money and consequently whether it is a “financial supply” for GST. They concluded that Bitcoin was not money, the supply of Bitcoin is not a financial supply, and that Bitcoin transactions are taxable supplies.
The GST ruling caused the Australian Digital Currency Commerce Association to cry foul, as the ATO’s approach was a costly and impractical imposition of GST on every crypto transaction. The imposition of GST on the acquisition of cryptocurrency resulted in consumers losing one-eleventh to GST on every conversion of Australian dollars to a cryptocurrency. As a consequence of the ATO treating Bitcoin like a commodity rather than a currency, CoinJar, Australia’s biggest Bitcoin exchange platform, moved to the UK. Their explanation for the move was that the UK had a more progressive regime, where Bitcoin didn’t attract a VAT tax.
It took two years and a Senate enquiry to implement legislative amendments to the GST legislation, which resulted in digital currency having the equivalent treatment to money and, in certain circumstances, supplies of digital currency being treated as financial supplies. The 2014 GST ruling was withdrawn with effect from 18 December 2017.
Crypto as foreign currency
In the 2014 Income Tax guidance, the ATO contends that Bitcoin is not a “foreign currency” for the purposes of the foreign currency provisions. Under these stipulations, a “foreign currency” includes “a currency legally recognised and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for all transactions and payments in that country”. Broadly, these operate to tax taxpayers on gains or losses made on foreign currency. The rules apply to gains and losses that arise as a result of fluctuations in a currency exchange rate or to that of an agreed exchange rate differing from an actual exchange rate. Thus, taxpayers would be taxed on gains and losses attributable to fluctuations in the exchange rate or price of bitcoin.
Since the ATO released its guidance in 2014, bitcoin has become widely accepted as a currency legally recognised and adopted under the laws of various countries as a monetary unit and means of discharging financial obligations, enabling it to fall within the foreign currency provisions.
The fundamental difference between taxing cryptocurrency and Bitcoin as a CGT asset, as opposed to “foreign currency”, is the timing of the gain or loss recognition. Broadly, where the gains are calculated under the CGT or trading stock provisions, they will be recognised up front or (possibly) at an earlier point in time than under the foreign currency provisions. Although Bitcoin may still fall within the definition of a CGT asset or be considered trading stock for income tax purposes, the foreign currency provisions would take precedence if they applied.
The future tax treatment of crypto
Currently, in Australia, crypto is treated “just like money” for GST purposes, but not for income tax purposes. It is unfortunate and untenable for any tax system. In January 2018, the ATO announced the formation of a special task force to help enforce and monitor the taxation of cryptocurrency. As the legislative amendments have addressed the impractical imposition of GST on every crypto transaction, it is hoped that this ATO task force may in the future reconsider the views expressed in the 2014 income tax guidance. Not only is greater clarity required on the income tax treatment of cryptocurrencies, but also a fresh approach to the challenges that cryptocurrencies impose on our tax system.
Superman was able to reconcile his dual nature, integrate with society, and become an iconic force for good. Without the constraints of a confusing and impractical tax regime, Bitcoin and other cryptocurrencies should have the same success in Australia!
Tony NunesKelly + Partners Chartered Accountants, Sydney, Australia
T: +61 2 9233 8866
Kelly + Partners manages the individual needs of private business owners, high net worth individuals, and significant families. Kelly+Partners is an integrated financial services firm offering clients expertise in Chartered Accounting and Business Services, Tax Legal, Private Wealth and Family Office.
Tony Nunes is an experienced tax practitioner with over 23 years’ experience in providing tax advice across a range of industries. He brings deep technical expertise to any engagement with an understanding of its broader commercial impact.
Published: Spring 2019