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Crypto and income tax

Taxpayers will be provided with increased certainty around the treatment of crypto and income tax, following the Government’s release of draft legislation on 6 September 2022.

Introduction – crypto and income tax

The exposure draft follows an announcement made in June 2022 by the Albanese Government to clarify that digital currencies, such as Bitcoin and other similar digital currencies, will not be regarded as a foreign currency for tax purposes.

The proposed changes to the law are a direct response to the Government of El Salvador’s decision to accept Bitcoin as legal tender; a decision which some considered had an impact on whether Bitcoin was a foreign currency for Australian taxation purposes.

The exposure draft

The exposure draft proposes three key changes to the law:

  • amending the existing definition of ‘digital currency’ in the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include digital currencies that are denominated in a currency that is not issued by, or under the authority of, an Australian government agency or a foreign government agency;
  • amending the definition of foreign currency in the Income Tax Assessment Act 1997 (1997 Act) to exclude digital currencies (as defined in the GST Act); and
  • amending the 1997 Act to include a power to make regulations to provide for further exclusions from the definition of foreign currency in that Act.

The effect of these changes to crypto and income tax

If enacted, the effect of the proposed changes will ensure that while government-issued digital currencies may meet the definition of a foreign currency for income tax purposes, this will not extend to digital currencies that have been adopted as a legal tender but are not government-issued (ie the El Salvador example).

It is proposed that the changes will apply retrospectively from 1 July 2021, although the explanatory materials for the exposure draft legislation state that the legislation ‘maintains the status quo prior to the El Salvador decree’, implying that there is no actual change in the law.

While the explanatory materials also state that the income tax treatment of digital currencies depends on the individual circumstances of the taxpayer they, interestingly, make the comment that:

For example, an investment in bitcoin is typically held on capital account. If this is the case, gains or losses arising from the disposal of bitcoin would be subject to the CGT rules.

It is unclear why the drafters considered it necessary to comment on whether a digital asset would typically be held on capital or revenue account. Whether any asset is held on capital or revenue account is a question of fact, and must be considered in light of the applicable case law (of which there is an abundance). It would be inappropriate to consider that there is a typical or ‘one size fits all’ answer for all taxpayers.

In any event, while the proposed changes may not be universally popular, they will provide taxpayers with increased certainty. Further, the fact that the exposure draft leaves open the possibility that government-issued digital currencies may meet the definition of a foreign currency for income tax purposes shows a welcome degree of insight from the drafters.

Submissions regarding the exposure draft legislation were due by 30 September 2022.

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