TAXATION OF CRYPTO ASSETS

With the advent of crypto asset exchanges, trading cryptos has become widely popular. However, from my personal experience, most people trading these assets seldom understand the tax consequences of trading or owning these crypto assets. This short blog is an attempt to shed some light on the tax implications of these assets. This is my first ever blog, so if I've made a few mistakes, I ask for your forgiveness :)

Bitcoin is a cryptocurrency while Ethereum is a platform token

What is a Crypto-asset?

A crypto-asset is an umbrella term. It encompasses all assets (cryptocurrencies, platform, utility and transactional tokens) that power most applications of the blockchain technology. Crypto-asset can be defined as a form of digital asset that utilises cryptography, peer-to-peer networking and a public ledger system to verify transactions without the intervention of a central authority, such as a bank. If you own digital assets such as Bitcoin or Ethereum, then you own crypto assets.

What records should you keep?

First things first! For you to be compliant, you must keep the following records:

· the date of the transactions.

· the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange).

· what the transaction was for and who the other party was (even if it is just their cryptocurrency address).

· receipts of purchase or transfer of cryptocurrency.

· exchange records.

· records of agent, accountant, and legal costs.

· digital wallet records and keys.

· software costs related to managing your tax affairs.

Keeping immaculate records will make it easier to calculate and meet your tax obligations, and if you are in business, they will assist you to manage your cash flow and see how your business is doing.

CAPITAL GAIN OR ORDINARY INCOME?

Tax consequences of owning crypto assets will depend on how you treat those assets.

Capital gain

If you are an investor, you are most likely to fall under the Capital Gains Tax (CGT) regime.

You may be eligible for a CGT discount if you’ve (as an individual, trust, or a complying super fund) held the asset for more than 12 months at the time of its disposal.

A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal can occur when you:

· sell or gift cryptocurrency.

· trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency).

· convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars, or

· use cryptocurrency to obtain goods or services – Personal use asset.

A few words on trade or exchange of cryptocurrency:

Trading or exchanging one cryptocurrency for another, will give rise to a capital gain/loss. E.g.: You bought 1 Bitcoin on 16/01/21 for $35,000 and then on 16/04/21 you exchanged your 1 Bitcoin for 15 Ethers. The price of Ethereum on 16/04/21 was $2,500. Then, for the purpose of working out your capital gain, the capital proceeds from the disposal of Bitcoin will be $37,500. This means that you will have made a notional capital gain of $2,500.

However, if you acquire a new crypto currency as a result of a “chain split” (e.g., Ethereum holders receiving Ethereum Classic), you do not make a capital gain at the time of receiving the new cryptocurrency. E.g.: If you held 10 Ethers pre-chain split on 20/07/16 and are given additional 10 Ether Classic post-chain split, you will not derive ordinary income or make capital gains from the new currency received. The acquisition date of your Ether Classic will be 20/07/16 and its cost base will be zero. If you sell 10 Ether Classic on 15/11/16 for, say, $8,000, then you will have made a capital gain of $8,000.

Chain splits require an examination of the relationships and rights that exists between the new asset and the original asset. If the new asset, as a result of the split, does not have the same rights and relationships (the core consensus rules have changed) as the original cryptocurrency you held, then the original asset may no longer exist. CGT event C2 will happen for the original asset and the new cryptocurrencies you hold as a result of the chain split will be acquired at the time of the chain split with a cost base of zero.

A few words on Personal use asset:

The last point might be of interest particularly to crypto enthusiasts, who use the currency only for the purpose of obtaining goods or services. If you have used crypto assets ONLY to obtain goods or services, then the asset will be treated as a Personal Use Asset and may not be taxed at all!!!

So, what is the catch?

The catch is, that for it to be treated as such, it must:

· have been acquired for less than $10,000.

· NOT be used as an investment.

· NOT be used in a profit-making scheme, or

· NOT be used in the course of carrying on a business.

However, the cryptocurrency will not be a personal use asset if:

· you exchange your cryptocurrency to Australian dollars (or to a different cryptocurrency) to purchase items for personal use or consumption, or

· you use a payment gateway or other bill payment intermediary to purchase or acquire the items on your behalf (rather than purchasing or acquiring directly with your cryptocurrency).

Whether or not a crypto asset is a personal use asset will ultimately be decided when it is disposed of. The longer a crypto asset is held, the less likely it is that it will be a personal use asset. E.g., if you held Bitcoin for a period of 6 months before ultimately using it to buy goods and services, it will not be treated as a personal use asset.

Ordinary income

If you hold cryptocurrency for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.

Examples of businesses that involve cryptocurrency include:

· cryptocurrency trading businesses

· cryptocurrency mining businesses

· cryptocurrency exchange businesses (including ATMs).

To be carrying on business, you will usually:

· carry on your activity for commercial reasons and in a commercially viable way

· undertake activities in a business-like manner – this would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan

· prepare accounting records and market a business name or product

· intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term.

There is also usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.

New assets received for Consensus Mechanism participation

Cryptocurrencies or Tokens received as a result of various Consensus Mechanism (such a Proof of Stake, Proof of Authority, Guardian Nodes etc.) are treated as Ordinary income. Proxy Staking and Airdrops also have the same tax consequences.

There are numerous other activities related to crypto assets that have tax implications such as using cryptocurrency for business transactions, isolated profit-making business transactions, paying salary or wages in cryptocurrency (think FBT implications) and receipt of cryptocurrencies for services provided. I will not go into detail about them in this blog as they demand a separate blog of their own.

I hope this blog has provided you with some insights on crypto tax matters. If you want an in-depth advice on these matters, please get in touch with a professional.

El fin.....