Board of Taxation consults on the treatment of digital assets - Paper issued

In August 2022 the Board of Taxation issued a Paper providing the basis on which it would consult with the public on what the proper treatment ought be, for digital assets, such as crypto currency. This was to further the reference the Government made, to the Board, in March 2022.

The Consultation Paper is attached (below) and the following are extracts from this Paper.

Overview of Crypto Assets

The digital economy presents challenges not only for traditional areas of law such as contract law, but also for tax law. The inherent characteristics of the internet mean that digitisation (as exemplified by crypto assets) potentially challenges fundamental concepts of tax law such as identification of a taxpayer’s residence, the source of income and the characterisation of the relevant assets and transactions.

The term crypto assets is commonly used to refer to types of digital financial assets that are based on distributed ledger technology (DLT) and cryptography as part of their perceived or inherent value. In today’s market, crypto assets have three primary uses:

- as an investment;
- as a means of exchange; and
- to access goods and services.

Crypto assets include (but are not limited to) cryptocurrencies such as bitcoin and litecoin, utility tokens such as filecoin, and security tokens. They may run on their own blockchain or use an existing platform like Ethereum. Crypto assets also include non-fungible tokens (NFTs). New decentralised business models have led to growth in the use of crypto assets across a number of areas including gaming, art, real estate, lending and security.

Electronic payment systems ‘based on cryptographic proof instead of trust’3 challenge the role and effectiveness of monetary policy as an important government lever in managing the economy. They may also present challenges from a taxation and monetary policy perspective if more jurisdictions authorise a cryptocurrency as legal tender.

A widely accepted principle for taxation is that profits should be taxed where the value is created. However, with respect to crypto assets, uncertainties arise in relation to the following tax policy issues:

1. Where to tax? (nexus) – what are the taxing rights in a country where entities transact using crypto assets;

2. What to tax? (value creation) – how to attribute profit (and recognise losses) with respect to these crypto assets; and

3. When to tax? (triggering of taxable events) – whether the creation, transacting and/or processing of crypto assets triggers a taxing point.

The creation, trade and use of crypto assets is in an ongoing state of evolution, and it is important to ensure that the tax framework remains appropriate. The tax treatment of some aspects of these assets may be viewed as uncertain and unclear, not only in Australia, but in comparable jurisdictions. In this regard, the purpose of the Board’s review is to consider Australia’s tax framework and whether changes are required to the existing tax laws or their administration in light of rapidly evolving changes in technology and the digital economy.

Appropriate policy framework

In developing an appropriate policy framework, the Board will analyse the tax treatment of crypto assets from creation to the various forms of exchange or disposal with a view to determining whether Australian taxation laws need to be amended and/or updated. Depending on the findings from the Board’s review, the recommendations made by the Board may include the establishment of a set of tax principles, amendments to current Australian taxation laws to comply with these principles, and/or the establishment of a new taxing regime.

It is important that a tax system does not impede businesses investment and innovation. The tax framework should also seek to deliver a neutral outcome; that is, it should not encourage or discourage substitution from crypto assets to other assets.

Additionally, this framework should support the ATO in administering compliance over the taxation of crypto assets in an efficient and cost-effective manner.

Relevant reports

The Senate Select Committee on Australia as a Technology and Financial Centre Final report

On 20 October 2021, the Senate Select Committee on Australia as a Technology and Financial Centre released a report which focussed on key areas affecting the competitiveness of Australia’s technology, finance and digital asset industries, including the regulatory future of cryptocurrencies and digital assets.

Former Federal Government’s response to the report

On 8 December 2021, the former Federal Government released its response to the report (and other reports relating to Australia’s payments systems).

In response to the recommendation made in the report in relation to the taxation of digital assets, the former Treasurer announced that to provide holders of digital assets (such as crypto assets) with clarity, the Board would commence a review into the appropriate policy framework for the taxation of digital assets and transactions in Australia. Hence, the purpose of the Board’s review.

Other Federal Government announcements

On 22 June 2022, the Treasurer and Assistant Treasurer issued a joint media release confirming that “Crypto currencies will continue to be excluded from foreign currency tax arrangements” from 1 July 2021. This announcement was made to provide certainty and clarity for crypto asset holders following the decision by the Government of El Salvador to allow bitcoin as legal tender of that country. When legislated, this will confirm the position in ATO guidance that crypto assets are not foreign currency for Australian tax purposes.

International developments

The Organisation for Economic Cooperation and Development (OECD) issued Addressing the Tax Challenges of the Digital Economy Action 1: 2015 Final Report, which sets out the challenges arising as a result of the spread of the digital economy.13 In this report, the OECD, amongst other things, indicated that:

“The digital economy also raises broader tax challenges for policy makers. These challenges relate in particular to nexus, data, and characterisation for direct tax purposes. These challenges trigger more systemic questions about the ability of the current international tax framework to deal with the changes brought about by the digital economy and the business models that it makes possible and hence to ensure that profits are taxed in the jurisdiction where economic activities occur and where value is generated ”.

On 12 October 2020, the OECD released its report on Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues, which analyses the emerging issues related to the taxation of virtual currencies, as well as the evolution of the consensus mechanisms used to maintain blockchain networks (a shared, distributed ledger that records transactions across business networks) and the growth of decentralised finance. 14 This report also highlights a number of key insights that policymakers may wish to consider in strengthening their legal and regulatory frameworks for taxing virtual currencies.