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Digital assets

The Board of Taxation has published their much-anticipated Consultation Guide for the review of the tax treatment of digital assets and transactions.

Background – tax treatment of digital assets

On 8 December 2021, the former Treasurer announced as part of a broader response to a review on Australia’s payments system and the regulation of digital assets that the Government would task the Board with undertaking a review into the appropriate policy framework for the taxation of digital transactions and assets in Australia.

The Guide invites interested parties to participate in one of the seven consultation sessions.

The proposed consultation questions broadly surround identifying:

  1. Uncertainties created and/or incompatibilities arising from our tax laws in taxing crypto assets
  2. How do different taxpayers view the tax treatment of crypto assets, for example, retail vs wholesale investors?
  3. Improvements that Australia can make in taxing these arrangements (including improving tax transparency and lessons Australia can learn from other jurisdictions)
  4. Changes required to be made to Australia’s taxation laws to tax crypto assets
  5. Compliance improvements to assist taxpayers in completing their tax obligations, including what additional support can be provided to assist.

Any written submissions are due by 30 September 2022. The Board of Taxation (BoT) is also running several consultation sessions throughout September to gather feedback on the questions posed in the Consultation Guide and, more broadly, to gather insight into other issues relevant to the current Australian tax treatment of crypto assets. It is expected that BoT will issue its final report by December 2022.

The Review is part of a much broader focus by the Australian Government (and international revenue regulators) on the many complex tax issues arising from digital assets.

While the Australian Taxation Office has frequently released guidance on the treatment of digital assets since 2014, the Review by BoT is a welcome step to ensure that the tax policy and administration best reflect the current state of the technology and its challenges.

Crypto assets and digital transactions under the tax spotlight

As bitcoin prices and other digital currencies take rollercoaster rides, authorities worldwide are under increasing pressure to provide appropriate tools to regulate crypto assets and digital transactions. The Board of Taxation (the Board) recently commenced its consultation on the taxation of digital assets and transactions.

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) from recording 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 file coin), security tokens, as well as non-fungible tokens (NFTs).

Taxation of crypto assets and digital transactions

There are 3 fundamental concerns underlying the taxation of digital assets and transactions:

1. Where to tax (ie nexus)? What taxing rights are in a country where entities transact using crypto assets?

2. What to tax (ie value creation)? How do attribute profit (and recognise losses) for these crypto assets?

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

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), 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 a type of currency for tax purposes. Income from mining or exchanges is 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. In contrast, 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 the exchange at all.

The Australian treatment is consistent with the above OECD findings. In particular, the ATO does not consider a bitcoin a foreign currency for Div 775 of ITAA 1997.

To reinforce this view, the Treasurer and Assistant Treasurer confirmed in June 2022 that legislation would be introduced to clarify that crypto assets would not be regarded as foreign currency from 1 July 2021.

For CGT purposes, the ATO said that a bitcoin could constitute a CGT asset under s 108-5(1) of ITAA 1997. Again, the Treasurer and Assistant Treasurer confirmed that CGT would continue to apply to investments in crypto assets.

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

GST on digital assets

According to the OECD Report, there appears to be more consistency concerning 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 this is often for practical reasons. Countries may wish to avoid considering 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 payment method are the same as those of using money as payment.

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.

Other tax implications for digital assets

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

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 the employee’s income.

Finally, the OECD began a consultation in March 2022 for a new global tax transparency framework to provide for the reporting and exchange of information concerning crypto assets.

The framework will provide for the collection and exchange of tax-relevant information between tax administrations concerning 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 a 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 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 renewable energy for these activities.

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