Melbourne Tax Discussion Group 19 June 2019 Taxation of - - PowerPoint PPT Presentation

Melbourne Tax Discussion Group

19 June 2019

Taxation of Cryptocurrencies

What is blockchain?

What is blockchain?

• Public v private
• Decentralised network
• Consensus protocols (e.g. Proof of Work, Proof of Stake)
• Smart contracts
• Token economies
• Tokens incentivise spending and certain behaviour within the token economy –

native token/cryptocurrency and utility token

• DAOs and dApps

Why is blockchain important?

https://steemit.com/kr/@powerguy/the-blockchain-ecosystem-map-v3-0

What are cryptocurrencies?

• First wave of blockchain technology
• Useful case studies:
• Benefits and limits of blockchain technology
• Whether traditional tax principles are fit for purpose

What are cryptocurrencies?

• Pure digital cash – Is bitcoin money? ATO says no
• Medium of exchange (declining acceptance by merchants but could this

change?)

• Store of value (means of increasing wealth rather than maintaining wealth)
• Unit of account (volatility doesn’t lend itself to meeting this element)

What are cryptocurrencies?

• Digital tokens
• Stable – fiat-collateralized, crypto-collateralized, non-collateralized
• Utility
• Security
• Sovereign

Application of traditional tax principles to cryptocurrency

Scenario Revenue CGT

Buy and hold for < 12 months Buy and hold for > 12 months , access to 50% CGT discount Buy with intention to hold for > 12 months, but then sell within 12 months Acquire and use for personal use personal use asset exemption Exchange arbitrage

Application of traditional tax principles to cryptocurrency

Hard forks Impact Tax issues

• Original cryptocurrency
• No impact?
• Split or changed?

If held on revenue account:

• Do facts support apportionment of original

crypto cost of acquisition? If held on capital account:

• Do facts support apportionment of original

crypto cost base?

• New cryptocurrency
• Receipt of new crypto for

no consideration, from code managed by a decentralized network of miners Revenue or capital receipt? If revenue receipt:

• Assessable on MV of new crypto

If capital receipt:

• Is CGT Event H2 triggered?
• What is MV of new crypto?
• Does MV substitution rule apply to cost

base of new crypto – meaning of ‘entity’

Application of traditional tax principles to ICOs – Basic ICO framework

• Initial costs:
• Developers, legal and accounting, marketing
• Token economics (supply limit, burn rate, etc)

Pre- ICO

• Legal and beneficial ownership?
• Value of tokens at time of creation?

Tokens created

• Investors send crypto consideration to issuer

ICO period

• Tokens released to investor wallets
• Gains/losses on conversion of crypto consideration to AUD
• Some tokens retained by ICO team for various purposes

Post- ICO

• s 8-1, 40-455, 40-880?
• Acquisition cost of

tokens?

• R&D Tax Incentive?
• CGT cost base of

tokens

Revenue Capital

• Allocate cost of

acquisition/producing tokens

• CGT Event D1?
• CGT Event A1?
• Profit-making scheme
• Ordinary business

income derived (if no refunds)

• Assessable gains /

deductible losses

• Capital gains/losses

KEY MESSAGE: Consider tax outcomes of ICO to manage mismatches (timing, rev/cap) and cash tax

GST issues

• GST definition of “digital currency” is out of date
• GST registrations
• How are multi-characteristic tokens treated (e.g. attributes of security

token and utility token)

• Other issues

Treasury review into ICOs and tokens

• “Personal use” wallet election for individual token holders
• “De minimis” exemption for individual token holders
• Clarity on the tax treatment of airdrops
• Call for administratively binding guidance from the ATO (rather than web

guidance)

• Call for introduction of statutory organisation to oversee Australian

blockchain projects over a certain period to better understand potential of technology and impact to Australian industries and economy

ATO cryptocurrency data matching protocol

• Protocol will span from FY15 to FY19 income years
• A key is to identify taxpayers that have not complied with their tax obligations
• Businesses that accept cryptocurrency as payment for goods and services, or that are

paying staff in cryptocurrency, need to ensure they are aware of the guidance published by the ATO about the tax treatment of cryptocurrency used in business

• Cryptocurrency trading businesses will need to ensure they are applying the trading

stock rules correctly. In large part, many individuals would be viewed as carrying on a cryptocurrency trading business as a sole trader.

• Just because a business of cryptocurrency trading is going on, it does not necessarily

mean that all of the cryptocurrency is held as trading stock. In some cases, the cryptocurrency holdings are better characterised as held like cash at bank, or held as an investment (and subject to the capital gains tax rules).

Disclaimer

The comments in this presentation are intended as high level comments rather than advice. This presentation is not to be used or relied upon as a substitute for comprehensive professional advice. Before acting on any matter in this area, you should discuss your situation with a suitably qualified professional adviser.