Gary Anders | November 2022
This article was current at the time of publication.
Australian and international tax laws are highly developed and specific when it comes to the treatment of traditional investment assets like listed shares, bonds and property.
However, in the parallel universe of a growing array of digital assets, tax regulators are struggling to keep up with a rapid change in what is still a largely unregulated sector.
The tax treatment of cryptocurrencies, non-fungible tokens (NFTs), and a wide range of other tradeable blockchain-based digital tokens are likewise causing major headaches for governments, other financial regulators, accounting professionals, financial advisers and taxpayers.
The Australian Taxation Office (ATO) estimates that more than one million taxpayers have interacted with the crypto asset ecosystem since 2018.
As part of a broader response to a review of Australia’s payments system and the regulation of digital assets, the former Morrison government announced in December 2021 that the Board of Taxation would be reviewing the appropriate policy framework for the taxation of digital assets and transactions in Australia.
Separately, the current Albanese government recently announced that Treasury will undertake a “token mapping” exercise to help identify how crypto assets and related services should be regulated.
Submissions to the Board of Taxation were due on 30 September 2022 and included a joint submission by CPA Australia, The Tax Institute, Chartered Accountants Australia and New Zealand, Law Council of Australia and Institute of Public Accountants.
“The taxation of digital assets and transactions is not well understood by taxpayers or tax practitioners, with current ATO guidance being general in nature and not providing sufficient clarity on many common scenarios,” the joint bodies noted.
“We acknowledge that potential changes to the tax framework surrounding digital assets and transactions are a complex topic that will likely require time to implement.
“For this reason, we consider that a staged approach should be taken, starting with the high priority and easier-to-address aspects, and allowing adequate time to deal with broader and longer-term issues.”
Digital assets tax: a global problem
King & Wood Mallesons Tax Partner and President of The Tax Institute, Jerome Tse, says countries around the world are grappling with the digital assets tax treatment issue.
“How you tax digital assets is generally unclear and I don’t think well understood by most taxpayers,” Tse says.
“A lot of taxpayers just want to do the right thing and there’s not a lot of clarity on what the right thing is.
“That’s not an indictment of the ATO or government – it’s just because of the changing nature of these assets and the newness of it – but we do need some clarity so that taxpayers when they file their tax returns every year can understand what the law is and how to evidence it.”
Digital complexities: blockchain, bifurcation and more
Principal of Blockchain & Digital Assets Joni Pirovich adds that traditional tax laws may apply when a digital asset like a token is available only for single use, such as to raise capital.
However, Pirovich says things become more complex when digital tokens can be used to raise capital and as vouchers to access other services and assets on a blockchain network (known as bridging).
“We should be able to choose which blockchain we want to transact on and to mobilise that value without having a tax event,” she says.
Other complexities revolve around blockchain forks (when a single blockchain diverges into two potential paths) and splits (when two or more cryptocurrencies share the same blockchain for a certain time before diverging).
“In tax law, the hardest thing is trying to determine whether you bifurcate a token – whether you split up a token at the time of its issue to reflect its different functions – and how you treat it from the issuer’s perspective as assessable income or not,” Pirovich says.
“Then, when there are distributions with respect to that token, which typically requires the token to be ‘staked’, we still don’t know whether it’s like getting interest from your bank account or a dividend from a share and whether staking is a tax disposal event.
“We still don’t have a framework that properly allows us to take a principles-based approach and look at what’s happening with these tokens and apply a reasonable and sensible set of principles.”
Onus on taxpayers
Private binding rulings are one of the few available sources of more detailed information with specific references to legislative provisions and the application of tax law principles to digital assets and transactions.
Even so, the use of web guidance also implies a positive obligation on taxpayers to check its status at least every income year, although web guidance is subject to change without notice.
“I have some sympathy for governments and revenue agencies in deciding how to treat this evolving, amorphous asset base,” Tse says.
“But we do need guidance from the ATO and Treasury and hopefully the Board of Taxation review will give us at least a starting point.
“We need a whole-of-government approach to digital assets. There’s no point in the ATO doing something, then Treasury doing something, and then ASIC [Australian Securities & Investments Commission] doing something else.”
Priorities and reforms
The joint bodies identify a range of short-term priorities including:
- appropriate methods for tracking, tracing and valuing gains and losses arising from digital asset transactions, and
- the tax implications of common activities undertaken by taxpayers including staking, bridging, play-to-earn (P2E), game decentralised finance (GameFi) and decentralised finance (DeFi).
Longer term reforms recommended by the joint bodies include a holistic approach to regulatory frameworks and driving greater engagement between the ATO and taxpayers.
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