In The Tax Institute’s weekly TaxVine email (No.36, 30.9.2022), their member: Elizabeth Morton, FTI, Lecturer and Research Fellow at RMIT University, shared her insights on the taxation of cryptocurrency and digital assets (in an article that is a very good round up, of where we stand now, on the taxation of ‘cryptocurrencies’, in Australia). Everyone can agree that the explosion of cryptocurrency and digital assets has been nothing short of astonishing. Accompanying a ballooning in the number of taxpayers dealing in cryptocurrency is the growing concern in recent years over the difficulties in tax compliance for the crypto economy. Unlike shares, there is no minimum spend and participants can enter complex financial arrangements with a few clicks of the button. This fundamentally begins with the ability to make frequent transactions with neither an intermediary nor traditional forms of money.
Economic activity can occur multiple levels away from the Australian dollar (crypto-to-crypto), within and across blockchains. Each and every step potentially triggering a taxable event (or conversation) owing in part to basic principles of barter. Diverse activities can vary from crypto being used as a means of payment, speculative investing or trading, participating in creative industries (for example, music, and art), as well as towards gambling.
Many participants have often been staggered to know that:
- Despite being fun and experimental, activity is caught within the tax net
- Crypto-to-crypto transactions generally trigger taxable events
- Unless characterised on revenue account, losses are restricted to offsetting capital gains
- The CGT personal use exemption has limited application
- The ATO interprets allocating crypto assets to protocols such as liquidity pools as disposals
- While rewards earned from liquidity pools and staking are being interpreted as broadly ordinary income, further issues arise with respect to the timing of income derivation
- Any income earning activities generally coincide with crypto asset acquisitions
- Wrapping and bridging are being interpreted broadly as disposals (coinciding with new crypto asset acquisitions).
The list can go on and many of these interpretations are controversial. Often treatment will be both taxpayer and protocol dependent, i.e. blockchain activity is by no means equal. While these activities can be analogous to traditional financial arrangement activities (such as financial instruments, securities lending, loans), crypto activities simply do not quite fit.
Third party assistance
The volume and diversity occurring on blockchain means that manual reconciliation is becoming less realistic for many clients. Increasingly, tax practitioners are turning to third party software — crypto ‘calculators’ — as a starting point. These facilitate the compilation of crypto activity in line with government guidance, however, raise the core issue of the extent they can be relied on without impacting the Code of Professional Conduct in the Tax Agent Services Act 2009.
Taxpayers’ facts and circumstances are crucial in applying a less than black and white tax system. While third party calculators are becoming increasingly necessary, they are not necessarily sufficient in of themselves. They are not designed to substitute tax advice; instead they offer a mechanism to begin making sense of taxpayers’ activities. They are also reliant on the taxpayer disclosing all their activities across all their wallets. Tax practitioners need to be mindful of adjustments made to generated outputs as well as the quality of inputs.
Tax practitioners need to consider their level of competency in this technology to make sense of their clients’ affairs while managing the uncertainty in tax treatments. The only crypto-tax guidance that is currently binding on the Commissioner is the set of 2014 tax determinations (TD 2014/25, TD 2014/26, TD 2014/27 and TD 2014/28). These do not capture the dynamic activity occurring on blockchain, including many of the abovementioned positions. ATO web guidance is often controversial, fluid and can create administrative challenges in advising clients — for example, the recent change in ATO positioning on airdrops may lead to the need for some taxpayers to amend their tax returns.
The Board of Taxation review gets underway
The ‘Australia as a Technology and Financial Centre’ Senate committee, in their 2021 Final Report, recommended that the CGT regime should be amended so that crypto transactions would create a CGT event only when they ‘genuinely result’ in a ‘clearly definable capital gain or loss’. This raised a multitude of questions for the profession and the former government instead tasked the Board of Taxation (BoT) to undertake a broad review of the appropriate treatment of taxing digital assets and transactions. Additionally, the Government has also recently announced that they will also carry out a token mapping exercise.
The BoT review formally began in September 2022, with written submissionsbeing accepted until 30 September and numerous consultation sessions being held throughout the month. The BoT is interested in not only the current treatment of crypto assets, but awareness of the tax treatment, characteristics and features of crypto assets, the international experience and what changes to tax law should be considered. The BoT is keen to hear about tax technical and tax administration examples and experiences and is scheduled to release its report at the end of the year.
The proposed amendment to what constitutes foreign currency
In June 2022, the Government announced that it would amend the law to ensure crypto assets would not be considered foreign currency. This in essence ensures that the Government’s position outlined in TD 2014/25 Income tax: is bitcoin a ‘foreign currency’ for the purposes of Division 775 of the Income Tax Assessment Act 1997? remains the status quo.
With a focus on Bitcoin, part of the Government’s position relied upon there being no sovereign state that recognised the crypto as legal tender. While the 2014 position was reinforced by McCabe DP in Seribu Pty Ltd and Commissioner of Taxation (Taxation) [2020] AATA 1840 (see [28]–[30]), uncertainty began to mount when El Salvador recognised Bitcoin as legal tender.
With the release of the proposed legislative amendments for consultation in September (which will clarify that crypto is not taxed as foreign currency), the Government has acknowledged that El Salvador’s recognition questions Bitcoin’s characterisation. However, the amendments go further. In amending the GST Act’s definition of digital assets as well as the ITAA 1997 definition of foreign currency (including adding a reference to the GST Act for the digital asset definition), they include the power to prescribe regulations to exclude further currencies from the definition of foreign currency which enables the agility to respond to further blockchain developments. This point is certainly going to spur debate across the consultation process, particularly with respect to complexity, certainty, and process.
More generally, the Government provided an implicit nod to the potential of blockchain technology. A further element to the proposed amendments is the specific details with respect to government-issued digital assets. The effect of the amendments will enable government-issued crypto to fall within the scope of the foreign currency regime.
As discussed in TaxVine No. 29 on 12 August 2022, The Tax Institute is supporting a research project, led by myself, as well as Assoc Prof Gillian Vesty (RMIT), Dr Lan Nguyen (RMIT) and Assoc Prof Ken Devos (Swinburne University), on the impact and challenges of blockchain-related activities on tax practitioners in Australia.
Members of The Tax Institute with at least one client who has undertaken blockchain-related activities are invited to have their say by participating in a short 15-minute online survey. Participation in this research project isvoluntary and anonymous and The Tax Institute will not be privy to your participation.
Your views on the implications of blockchain technology on public practice and tax compliance can be expressed in the survey by clicking on this link. More information on this can be found in the Advocacy Tracker below.
Closing comments
While next steps involve the finalisation and release of the final report of the BoT’s review, and the passage of the proposed legislative amendments, ongoing, relevant and timely guidance from the ATO will be paramount. The Tax Institute’s Tax Policy and Advocacy team will keep you informed about developments in this space.
You can also hear the latest from Julian Humphrey, CTA, KMPG, and Luke Imbriano, FTI, KPMG Law, on the taxation of, and the ATO’s views on, digital assets at Session 17.5 of The Tax Summit on Friday 21 October.
Kind regards,
Elizabeth Morton, FTI
RMIT University
[Tax Month – October 2022 – Previous Month, 8.10.22]