As a result of the rapid digitalisation of businesses and economies, transactions involving cryptocurrency and other digital assets have increased substantially in a relatively short period of time. Concerns have arisen that the current tax system is not robust enough to appropriately tax the value generated from holding / trading in digital assets without increasing the overall tax burden and restricting economic growth.
Subsequently, the Board of Taxation began a review of the policy framework for taxing digital transaction and assets in Australia. On 21 March 2022, the BoT was asked to analyse and consider several questions, including:
- The taxation of digital assets and transactions in comparative jurisdictions and how international experience may inform the taxation of digital assets and transactions in Australia, and
- Whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.
The BoT has now released a consultation guide which summarises the current ATO guidance on tax treatment and provides a number of questions for interested parties to consider. Interested parties are invited to provide input into the review by 31 December 2022.
What are ‘digital assets’?
The Board of Taxation defines ‘crypto assets’ as “digital financial assets that are based on distributed ledger technology (e.g, blockchain) and cryptography as part of their perceived or inherent value”. Crypto assets are commonly used as a means of exchange, as an investment, or to access goods and services.
What are the concerns with the current tax system?
Income tax rules typically seek to tax profits where value is created. Concepts of tax residency, physical presence and ‘source’ have historically been used to identify where value is created. However, as identified by the BoT, “the inherent characteristics of the internet mean that digitisation (as exemplified by crypto assets) potentially challenges fundamental concepts of tax law such as identification of a taxpayer’s residence, the source of income and the characterisation of the relevant assets and transactions”.
Where it is not possible to identify an appropriate tax residence or source, this increases the risk that two or more countries will seek to tax the proceeds (or perceived economic gain) associated with digital assets. Since most double tax agreements allocate taxing rights using source or residency, relief from double taxation may be unavailable where source or residency cannot be identified. This risk is exacerbated where countries unilaterally amend their rules for taxing digital assets.
In addition, although digital assets may have characteristics that are typically associated with a ‘currency’, the Australian Government has announced that cryptocurrencies will continue to not be recognised as foreign currency for tax purposes. For taxpayers who hold their digital assets as an investment, this necessitates the identification of a specific asset, a cost base for that asset, and the proceeds associated with transactions involving that specific asset to calculate a tax liability.
For taxpayers who use digital assets in their business, there can be complex practical issues on tracing individual assets to recognise profits, determining if they are held as trading stock or calculating gains and losses on foreign exchange movements.
The result is, the more digital assets a taxpayer holds / contracts with, the larger their compliance burden.
What does the review mean for you?
Determining how these assets are taxed can be complex. Until the BoT’s review is finished and the Government has had the opportunity to consider the outcomes of the review, taxpayers will need to continue to apply the ATO’s existing guidance. However, this existing guidance is mainly targeted at the simple situations in which many retail investors find themselves. For more sophisticated investors and businesses, the current guidance is unlikely to be adequate, and they will need to seek advice from tax specialists in this area.
Maintaining detailed records of transactions involving crypto assets will be key to mitigating any compliance burden. At a minimum, taxpayers should maintain records which show:
- the dates crypto assets are acquired.
- any date that one type of crypto asset is converted to another type and/or fiat currency
- documentation of the terms upon which crypto assets may be used as collateral or ‘staked’ as part of a mining exercise
- the terms upon which crypto assets may be held in a particular wallet / any restriction on use, and
- the dates when transactions involving crypto assets occur.
Where a taxpayer moves countries and changes tax residence or is treated as a temporary resident for migration purposes, appropriate tax advice should be sought from qualified advisors in both countries.
For information on the taxation of cryptocurrency and other digital assets, please contact your local William Buck Tax Advisor.