Crypto assets — proposed tax amendment and current ATO guidance

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Cryptocurrency pricing has always been a bit of a roller coaster, though with the most recent drops in value, potentially resulting in substantial losses (at least on paper) for some people, and Tax Time 2022 upon us, it timely to consider some crypto tax implications.

The one-year price movement in bitcoin to early July is illustrated by the following graph:

The Australian tax position

Despite the ‘currency’ part of its name, cryptocurrency is not generally treated as currency in Australia and most world jurisdictions.

Australia does not have a tax regime specific to crypto assets. The ATO, tax practitioners and taxpayers alike have to apply existing laws to specific transactions that involve cryptocurrency.

Proposed legislative change to provide certainty

The Government has announced its intention to introduce Australia’s first cryptocurrency-specific tax law amendment.

In a joint media release on 22 June 2022, the Treasurer Dr Jim Chalmers and the Assistant Treasurer Stephen Jones confirmed that legislation will be introduced to clarify that crypto currencies will continue to be excluded from foreign currency tax arrangements.

The release comes in response to a decision by the Government of El Salvador in September 2021 to adopt bitcoin as legal tender which has the potential to create uncertainty about the status of crypto assets such as bitcoin for tax purposes in Australia. This is the first step to providing certainty but the legislative details are still to be released.

So if it is proposed to be clarified that crypto assets such as bitcoin and ethereum will not be treated as foreign currency, then how should they be dealt with for tax purposes?

Given the lack of legislative rules specific to crypto, practitioners and taxpayers will need to continue to refer to ATO interpretations and guidance.

ATO guidance

In 2014, the ATO released a suite of Taxation Determinations which set out the Commissioner’s views on various matters relating to bitcoin (one of the most common and well known cryptocurrencies):

  • TD 2014/25 — whether bitcoin is a ‘foreign currency’
  • TD 2014/26 — whether bitcoin is a CGT asset
  • TD 2014/27 — whether bitcoin is trading stock
  • TD 2014/28 — FBT implications where an employer provides bitcoin to an employee

The ATO website also contains non-binding general guidance on various types of crypto transactions.

In March 2022, the ATO update its guidance titled Cryptocurrency — investing, trading and gifting and the remainder of this article will cover the main points from this guidance.

The guidance is only relevant where cryptocurrency is held as an investment or a personal use asset — see other ATO webpages where cryptocurrency is being used in business or other situations.

New ATO guidance

In June and early July, the ATO released new or updated guidance material including:

Cryptocurrency as a CGT asset

Where cryptocurrency is held for investment purposes, the ATO will treat it like shares and many other investments. In this way the ATO holds that it is generally a CGT asset and the tax implications to be considered are consistent with those that arise from other CGT assets.

Particular types of CGT events identified regarding cryptocurrency can include:

  • selling it for a fiat currency (e.g. AUD or USD)
  • exchanging one cryptocurrency for another type of cryptocurrency
  • gifting it
  • trading it
  • using it to pay for goods or services.

Below is an outline of the potential tax implications for individuals who undertake these different types of transactions. Remember that a taxpayer may have multiple holdings of crypto assets that they use in different capacities, e.g. an individual may trade crypto as a business activity while holding other crypto as a personal investment.

Reference
ATO fact sheet Crypto asset investments.

Implications for crypto investors

If a taxpayer is an investor, that is they buy cryptocurrency in the hope that it will grow in value over time, then any gains they make will be taxed as capital gains (or capital losses if they do not make money).

Each cryptocurrency will be a separate CGT asset. Where the taxpayer disposes of one type of cryptocurrency to acquire another this will trigger the CGT provisions be considered a disposal of one CGT asset and acquiring another CGT asset,.

If the taxpayer has held the cryptocurrency for 12 months or more they may be entitled to a 50 discount CGT discount to reduce any capital gains made when we sell or exchange the cryptocurrency. If instead they make a capital loss it can only be offset against any current year or future year capital gains and not other assessable income.

Reference
ATO fact sheet How to work out and report CGT on crypto.

Implications for crypto traders

If however, the taxpayer is a crypto trader carrying on a business, the trading stock rules will apply, rather than the CGT rules.

To determine if the taxpayer is a trader and in the business of trading crypto currencies it is necessary to consider:

  • the nature and purpose of our trading
  • the repetition, volume and regularity of the trading activities
  • whether they have a business plan and their trading activities are organised in a business-like way.

If disposing of cryptocurrency is part of the taxpayer’s business activities, then:

  • the cost of acquiring cryptocurrency held as trading stock is deductible
  • sales made are assessable as ordinary income, not as a capital gain
  • changes in the value of trading stock held at the end of the financial year may need to be reported, depending on the method selected.

Warning
The ATO holds the view that most people who transact in cryptocurrency are unlikely to be carrying on their activities to a degree that would be considered carrying on a business for income tax purposes. So, if the taxpayer has made a loss from crypto transactions and wants to claim it as a revenue loss against other income, they and their adviser must consider carrying on business requirement. Also be mindful of the non-commercial business loss rules.

Implications for crypto gifters

The taxpayer may be feeling generous and gift cryptocurrency to someone else, or they may receive it as a gift. Where the taxpayer:

  • gifts cryptocurrency — there is a disposal, which is a CGT event and may have consequences under the CGT rules
  • receive cryptocurrency as a gift — there are no CGT implications until they dispose of it.

Donations of crypto to charity

The taxpayer may want to support some worthwhile causes and it may be possible to use cryptocurrency to do so. Save the Children, an international NGO, was the first to accept a bitcoin donation in 2013. If the taxpayer is inclined to donate cryptocurrency, consider whether the gift is eligible for deductibility under the donation rules in Div 30 of the ITAA 1997. A taxpayer can only claim a tax deduction for gifts or donations to organisations that are registered deductible gift recipients (DGRs).

Crypto assets are property and there are special rules to determine the value of the gift. Further, the donation of a crypto asset is a CGT event, although there are a number of CGT exemptions that may apply when donating to DGRs.

Reference
ATO fact sheet Donating crypto assets.

Implications for crypto held for personal use

Most people hold cryptocurrency in the hope that they will make some money out of it. The ATO states that it is unlikely that a taxpayer would genuinely satisfy the personal use asset exemption.

Personal use assets are CGT assets held mainly for personal use or enjoyment — for example where the taxpayer holds crypto so that we can buy personal items online.

Cryptocurrency is not a personal use asset if it is kept or used mainly as an investment, in a profit-making scheme or in the course of carrying on a business.

A few words of caution:

  • The longer cryptocurrency is held without using it to transact for personal items, the less likely it will be a personal use asset.
  • The relevant time for working out if an asset is a personal use asset is at the time of disposal so be mindful of any changes to its use over time. For example, it may have been acquired for personal use and enjoyment, but ultimately kept or used as an investment to make a profit on when disposed or as part of carrying on a business.
  • Only capital gains made from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses made on personal use assets are disregarded.

Reference
ATO fact sheet Crypto as a personal use asset.

SMSF investment in crypto

Some SMSF trustees are investing in crypto — the ATO has highlighted some regulatory issues which may arise: see ATO fact sheet SMSF investing in crypto assets.

Mr Paul Delahunty of the ATO presented on current SMSF compliance issues and industry trends at the SMSF Professionals Day on 31 May 2022.

Investment by SMSFs in crypto has been fairly insignificant in recent years. The ATO’s March 2022 statistical data identifies the total SMSF crypto investment at just over $220M. Or in comparative terms, less than 0.03 per cent of all SMSF investment. This was reported by 3,345 SMSFs — approximately 0.6 per cent of all SMSFs.

Despite the seemingly low profile of SMSF investment in crypto, the ATO has been able to see that there was an increase in new registrants investing in crypto during 2020 with 4 per cent reporting crypto investments. It has had its first glimpse of the 2021 lodgment statistical information, and there are a few emerging trends:

  • the ATO is expecting similar growth in crypto investment by new registrants as that observed in 2020
  • growth is also expected to be observed in the broader SMSF population
  • for new registrants, the ATO is expecting to see a trend of higher asset concentration in crypto assets
  • the ATO is expecting an observable rise in the extent of SMSF investment in crypto assets.

In noting these environmental shifts, there are a number of important aspects for SMSF professionals to be contemplating for cryptocurrency.

Firstly, the ATO would like professionals to take note of recent ASIC advice — including for trustees to seek independent financial advice before investing in crypto. See the ASIC media release issued in January 2022.

Secondly, it is essential that trustees ensure that the investment:

  • is allowed under the fund’s trust deed
  • is made in accordance with the fund’s investment strategy and the trustees have considered the level of investment risk
  • complies with the investment restrictions under the superannuation laws.

Thirdly, there are a number of SMSF regulatory issues that trustees and SMSF professionals will need to carefully manage including ensuring the appropriate valuation of crypto assets and satisfying the sole purpose test. One particularly important area is the importance of ensuring that the crypto assets are owned by the fund and are held separately from the personal or business assets of the trustees.

Read Mr Delahunty’s full presentation here.

Other considerations

Taxpayers need to keep records in relation to their cryptocurrency acquisitions, disposals and other transactions: see ATO fact sheet Keeping crypto records.

The ATO is undertaking a cryptocurrency 2014–15 to 2022–23 data-matching program: see the data-matching protocol.

Further info and training

Podcast: Check out our Tax Yak episode – Cryptocurrency and tax

Webinar: Join us for our upcoming presentation – Cryptocurrency … the state of play. Available live on 31 August 2022 – all registrants receive a recording. Group discounts are available.

 

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