Crypto assets and digital transactions under the tax spotlight

The Board of Taxation (the Board) recently commenced its consultation on the taxation of digital assets and transactions. This article briefly explains what crypto assets are and the increasing scrutiny they are under; the income tax, GST and other tax implications; as well as the need to develop a comprehensive regulatory framework.

Crypto assets in a nutshell

Crypto assets are a digital representation of value that users can transfer, store or trade electronically. They are a subset of digital assets that use cryptography to protect digital data and distributed ledger technology (DLT) to record transactions.

Crypto assets can be used as an investment; as a means of exchange; and to access goods and services. Examples of crypto assets include cryptocurrencies (eg bitcoin and litecoin), utility tokens (eg filecoin), security tokens, as well as non-fungible tokens (NFTs).

Crytpo assets and digital transactions under increasing scrutiny

In Australia, it is estimated that more than one million taxpayers have interacted with the crypto asset ecosystem since 2018.¹ Accordingly, the ATO has urged taxpayers with crypto assets to be aware of their obligations this Tax Time 2022 and to keep records of their crypto assets and/or transactions. ² Meanwhile, the ATO’s data matching program on crypto transactions from 2014–15 to 2022–23 has been in place since April 2019 to identify individuals who may not be meeting their registration, reporting, lodgment or payment obligations.³

Taxation of crypto assets and digital transactions

There are three fundamental concerns underlying the taxation of digital assets and transactions:

1. Where to tax (ie nexus)? What are the taxing rights in a country where entities transact using crypto assets?
2. What to tax (ie value creation)? How to attribute profit (and recognise losses) with respect to these crypto assets?
3. When to tax (ie the triggering of taxable events)? Whether the creation, transacting and/or processing of crypto assets triggers a taxing point?⁴

Income tax, GST and other tax implications are discussed below.

Income tax and CGT

According to the OECD’s first comprehensive analysis in October 2020 on the taxation of virtue currencies (the OECD Report) ⁵, most countries consider virtual currencies to be property for income tax purposes, and tax them in the same way as other forms of intangible property. Very few countries consider them to be a type of currency for tax purposes. Income from mining or exchanges are often taxed as capital gains, or less commonly, as a form of capital or miscellaneous income. A minority of the countries distinguish between business activity and personal/occasional activity, with the former being taxed as income, while the latter is taxed as capital gains (or, in rare cases, is exempt from tax). Further, most countries consider all forms of exchanges of a virtual currency to generate a taxable event; a few countries exempt trades between different types of virtual currency; and a few more do not apply taxes at exchange at all.

The Australian treatment is consistent with the above OECD findings. In particular, the ATO does not consider a bitcoin to be a foreign currency for the purposes of Div 775 of ITAA 1997.⁶ To reinforce this view, the Treasurer and Assistant Treasurer confirmed in June 2022 that legislation will be introduced to clarify that crypto assets would not be regarded as foreign currency from 1 July 2021.⁷

For CGT purposes, the ATO said that a bitcoin could constitute a CGT asset under s 108-5(1) of ITAA 1997.⁸ Again, the Treasurer and Assistant Treasurer confirmed that CGT will continue to apply to investments in crypto assets.⁹

The ATO also said that a bitcoin could constitute trading stock for the purposes of s 70-10(1) of ITAA 1997,¹⁰ while an entity may be entitled to a deduction for a gift or donation of a crypto asset to a deductible gift recipient.¹¹

GST

According to the OECD Report, there appears to be more consistency with respect to consumption taxes such as the GST or the value-added tax (VAT), with most countries treating all aspects of virtual currencies as exempt or out of scope. The report said that this is often for practical reasons, as countries may wish to avoid having to consider the implications of a barter scenario, whereby a single transaction creates 2 sets of VAT liabilities and input credits.

In Australia, sales and purchases of digital currency are not subject to GST from 1 July 2017. The GST consequences of using digital currency as a method of payment are the same as the consequences of using money as payment.¹²

An NFT, however, is not a form of digital currency for GST purposes. The GST treatment of an NFT depends on whether the transaction meets the requirements of being either a taxable or GST-free supply.¹³

Other tax implications

For FBT purposes, the provision of bitcoins by an employer to an employee in respect of their employment is a property fringe benefit.¹⁴

Meanwhile, an employer who uses crypto assets to pay salary or wages will be subject to Pay as You Go (PAYG) withholding obligations, and the amount would be assessable as income of the employee.¹⁵

Finally, the OECD began consultation in March 2022 for a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto assets.¹⁶ The framework will provide for the collection and exchange of tax-relevant information between tax administrations, with respect to persons engaging in certain transactions in crypto assets. Individuals and entities that, as a business, provide services to exchange crypto assets against other crypto assets, or for fiat currencies, must apply the due diligence procedures to identify their customers, and then report the aggregate values of the exchanges and transfers for such customers on an annual basis.

Call for comprehensive regulatory framework

In Australia, reliance has largely been placed on haphazard administrative guidance the ATO dating as far back as 2014. It lacks a comprehensive legislative framework to tax crypto assets and digital transactions.

An October 2021 Senate select committee report on technology and finance made several recommendations, including that:

• The CGT regime be amended so that digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss, and
• Businesses undertaking digital asset “mining” and related activities in Australia receive a company tax discount of 10% if they source their own renewable energy for these activities¹⁷

In response, the former Federal Government requested the Board in December 2021 to commence a review on the appropriate policy framework.¹⁸

Accordingly, the Board commenced its consultation in August 2022. Its consultation guide, Review of the Tax Treatment of Digital Assets and Transactions in Australia, identified specific questions for consultation, including those relating to:

• The current tax treatment of crypto assets
• The awareness of the tax treatment of crypto assets
• The characteristics and features of crypto assets
• The international tax treatment of crypto assets and experience
• Changes to Australia’s taxation laws for crypto assets
• Administration of Australia’s taxation laws for crypto assets

Depending on its findings, the Board may decide to establish a set of tax principles, amend the current tax laws to comply with these principles, and/or establish a new taxing regime. Its aim is to provide a neutral outcome (ie it should not encourage or discourage substitution from crypto assets to other assets), as well as to support the ATO’s administration of the taxation of crypto assets and digital transactions. The closing date for comments is 30 September 2022, and the Board is required to report back by 31 December 2022.

The Board’s consultation is a much-anticipated event among tax professionals. It coincides with the government’s decision to commence consultation to improve Australia’s regulatory system for crypto assets generally.¹⁹ The consultation will aim to identify gaps in the existing regulatory framework, progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of crypto assets and provide additional consumer safeguards. As a priority, “token mapping” work commences in 2022 and a consultation paper on token mapping will soon be released.

Conclusion

In light of the rapidly evolving environment, Liberal Senator Andrew Bragg has criticised the Albanese government for “commissioning another review” and said that the government should “get on with the job of producing a draft bill rather than further reviewing”.²⁰   Regardless of the side one may take, it is without doubt that urgent action is required with respect to both taxation and general regulatory oversight, in order to provide clarity and certainty for this emerging ecosystem.

Last reviewed on 26 August 2022