Ever since the Cryptocurrency revolution started gaining traction all over the globe, an unprecedented level of public interest has now triggered some governments to introduce Cryptocurrency taxation laws. While the majority of the nations of the world are still treating Cryptocurrency as a tax free asset, countries like Australia have started introducing and/or modifying existing laws to cover crypto-taxation.
The topic of taxation of cryptocurrencies is a controversial one, with the global crypto community having mixed feelings about the same.
So what’s the Current Scenario like?
As mentioned before, the global crypto-community is divided on whether Cryptocurrency taxation is justified, as for some, it goes against its defining characteristic of decentralisation. Part of the challenges faced by both Australia’s tax payers and the Australia Taxation office is the existing legislation which has not been updated adequately to cover all Cryptocurrency related assets and projects.
Apart from some recent amendments made to the GST legislation, there is a general lack of official recognition or regulation when the ATO is concerned. This, however, does not exempt cryptocurrencies fully, as other taxation laws may apply to transactions involving any form of cryptocurrencies. The general misconception or misinterpretation of Australian Tax laws can land people into trouble, and should be made aware to every concerned individual or business entity out there. The ATO has released non-binding taxation guidance for cryptocurrencies and related assets in late 2017 which can be found here.
So How Do Taxation Laws Apply to Cryptocurrencies like Bitcoin or Ethereum?
Being in the dark about how different tax laws may apply to cryptocurrencies can be dangerous for both traders and investors. In recent years, the ATO has published its set of interpretations of how the existing income tax and GST laws should apply to the growing population of Cryptocurrency enthusiasts, both traders and investors. Primarily, the Australian Taxation Office is focussing on Bitcoin and how taxation laws apply to it.
The following are some instances where taxation laws apply to cryptocurrencies.
- Income Tax and it’s relation with Cryptocurrencies
When it comes to income tax, there is no official legislation by the ATO on the subject, however, in 2014, the ATO explicitly published its views on how income tax should apply on cryptocurrencies such as Bitcoin. Contrary to popular belief, the ATO does not categorise cryptocurrencies under any foreign currency, but consider it to be “property” for taxation rules. The income tax guidance issued by the ATO is however in direct conflict with the ATO’s GST ruling, where Bitcoin and related assets are treated as money for GST taxation. The Australian Government has not modified the income tax guidance, which have left many in the dark. It has however introduced “private binding ruling” for some tax payers relating to cryptocurrencies.
- Do Capital Gains Apply to Cryptocurrencies?
According to TD 2014/26, Bitcoin and all other cryptocurrencies are considered as Capital gains and hence classified as a CGT asset. In this context, CGT rules will be applied when the proceeds from the disposal of any Cryptocurrency exceeds its base price. However, in the case of any personal Cryptocurrency usage, like purchasing other assets, both capital gains and capital losses shall be disregarded and hence non-taxable.
For example, if an individual purchases any Cryptocurrency from an exchange and uses it to make online purchases for personal use such as clothing or music, the underlying asset is considered as a personal asset and will be exempt.
** It should be noted that the above laws apply only if the first element of the Cryptocurrency cost base is less than or equal to $10,000
- Do Anti-Money laundering laws Affect Cryptocurrencies?
As recently as December 13th 2017, law makers have made a significant modification to the existing Anti-Money Laundering and Counter-Terrorism Financing Act 2006 with the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017. This was done to extend the coverage of the existing laws to properly regulate Cryptocurrency institutions, including digital currency exchange providers.
They have also set aside a set of certain criteria in order to qualify:
- Mandatory Registration with the Australian Transaction Reports and Analysis Centre.
- Compulsory presence of a program to mitigate and manage money laundering or terrorism financing risks.
- Conducting appropriate KYC for proper identification and verification of customers.
- Reporting and conducting due diligence on transactions which exceed $10,000
So, what are the exceptions to this rule?
In spite of all the stringent rules in place for taxing cryptocurrencies, the ATO does allow some discounts of exemptions in certain cases. These are explained in brief below,
- Individuals who are Australian Residents shall receive a 50% CGT discount if the Bitcoin has been held for a period exceeding 12 months.
- Bitcoin or other cryptocurrencies which have been purchased with the intent of personal use or consumption (such as purchasing food, clothing) etc., all capital gains will be exempt.
The Bottom Line
The world of cryptocurrencies is still a relatively new concept which is slowly being understood by most governments and lawmakers around the world. On paper, tax treatments of cryptocurrencies do not differ greatly from traditional taxation. However, it is quite evident that the current laws on taxation need to be amended to a great degree to include the proper regulation of cryptocurrencies. As more and more institutional investors, major banks and government programs look towards blockchain technology, the need to regulate such borderless online transactions is a necessity in the future.
So as far as the present scenario is concerned, the current Australian tax law does not state anything explicitly. For instance If a trader purchases cryptocurrency assets under the guise of a personal use asset, then any profit or loss on the disposal of the asset is tax-free. It should be noted, however, that the ATO has very strict guidelines for ‘personal use asset’ classification and would be very hard in most cases to prove that. Individuals are thus advised to consult with tax firms who specialise in crypto-taxing to avoid unnecessary losses.