Australia Digging into Cryptocurrency Taxation As Value Swells

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By Peter Hill

The Australian Tax Office is preparing to demand client lists from cryptocurrency exchanges in a compliance crackdown, but industry players aren’t concerned about the scrutiny.

The focus comes amid a legislative tax framework that hasn’t kept pace with the virtual currency market development, and practitioners have flagged significant areas where guidance is needed. Australia is among a group of countries—such as the U.K., Japan, and Israel—that are grappling with the treatment of foreign currency as its popularity and value grow rapidly. Examples of cryptocurrency include bitcoin and ethereum.

The ATO wouldn’t confirm in a March 2 email that it will be seeking clients lists from cryptocurrency exchanges, despite press reports. However, an ATO spokesman referred to the use of existing requirements for institutions to identify clients of cryptocurrency exchanges. In that regard, said the Tax Office spokesperson, “the Anti-Money Laundering Counter-Terrorism Financing Act (AML/CTF Act) ensures that there is investor transparency through know-your-client requirements.”

He warned further that the increased transparency now provided by the AML/CTF Act, “combined with our data matching techniques and a range of existing powers which address unexplained wealth, further strengthen the ATO’s ability to tax cryptocurrency profits.”

And with expansion of anti-money laundering laws, set to begin in April, the ATO will likely match those client lists with tax returns to check if gains from the sale of cryptocurrency are being declared, Paul Drum, senior practitioner and head of tax policy at CPA Australia in Melbourne, said.

Cryptocurrencies “are the epitome of a disruptor,” but with looming changes to anti-money laundering law, blockchains are no longer “the steel trap of anonymity” they originally were, Drum told Bloomberg Tax.

Cryptocurrency Industry ‘Not Concerned’

Asher Tan, co-founder and chief executive officer of CoinJar in Melbourne, told Bloomberg Tax in an email March 2 that CoinJar may soon be receiving a request from the ATO for client lists, but said that they “are not concerned.” He said “service providers such as exchanges may already resemble existing regulated services such as foreign exchange dealers, or trading platforms. It makes sense that similar rules should apply.”

Coinjar bills itself as “Australia’s most popular Bitcoin wallet” and “a next-gen personal finance wallet.”

CoinJar receives “a fair few” inquiries from its members about the tax treatment of cryptocurrencies, Tan said.

“It is on their radar. Especially in the lead up to tax time, we will be letting everyone know how to best prepare their statements to include their cryptocurrency trading,” Tan said.

Sam Lee, chief executive officer of Blockchain Global in Melbourne, which claims to be Australia’s largest blockchain miner, told Bloomberg Tax in an email March 4 that its clients “are well aware about their tax exposures as it is part of our duty as a blockchain technology venture builder to understand how regulation, such as this, can impact business.”

Lee added that the company believes that by engaging more closely with regulators such as the ATO, “much-needed regulations that are more suitable and efficient for the digital industry” will be the result.

‘Going to Be a Revelation’

Cryptocurrency exchanges are trying to be legitimate and are working with regulators, Drum said, but he added that until the ATO gets into exchanges, “we do not know the extent of Australians getting involved. We’re not seeing a lot of businesses getting involved yet. We think it’s going to be a revelation for the ATO once they get into it.”

Drum noted that it wasn’t long ago that the ATO’s assessment of the fiscal risk associated with bitcoin was relatively low. In 2014, the ATO told a Senate committee inquiry into digital currency that each bitcoin had a value of about $375 and that it was “unable to verify” the claim that 7 percent of the world’s bitcoin was held by Australians. At that time, bitcoin was the only cryptocurrency with market strength in Australia.

Now that bitcoin is worth about $10,000 and people are cashing in and realizing significant profits, the ATO is beginning to take more notice, Drum said.

But in the meantime, the ATO is trying to fit its compliance activities focusing on cryptocurrencies within the constraints of tax laws that weren’t designed for them.

ATO Guidance Not Enough

While current ATO guidelines on the tax consequences of trading and investing in cryptocurrencies are “a good placeholder,” CPA Australia is encouraging the ATO to revisit them. According to Drum, this is because the CPAs feel the guidelines are too ambiguous and don’t give sufficient instruction.

The Tax Office told Bloomberg Tax that material on the its website “is up to date with guidance and advice that supports out current views.” It added that if a person or business buys and sells cryptocurrency on a trading basis, the taxpayer is assessable on any profits under ordinary concepts as income. But if gains are made on selling cryptocurrency as an investment, those gains are subject to capital gains tax.

Expanded Guidance Needed

Despite this view, practitioners beyond Drum and the CPA are concerned that current guidance on cryptocurrencies, and digital assets more generally, is insufficient.

Betsy-Ann Howe, partner with K&L Gates in Sydney told Bloomberg Tax in an email March 6 that “ideally it would be good see this information contained in a detailed Taxation Ruling to give taxpayers greater certainty and protection.”

Howe explained that though the guidance material states that it “also applies to other crypto or digital currencies that have the same characteristics as bitcoin,” there are many other alternative kinds of cryptocurrency that can be quite different from bitcoin.

In the future, “these alternative cryptocurrencies may come with voting or profit participation rights attaching—bitcoin currently has neither—so the ATO will need to deal with this accordingly,” Howe said.

Initial Coin Offerings

The ATO also needs to expand its guidance to deal with Initial Coin Offerings (ICOs), a way of raising money for a project over the internet which is “very different to an IPO,” Howe said.

“There have been substantial Australian ICOs including in relation to the Power Ledger project, where A$34 million ($27 million) was reportedly raised. The ATO should provide specific information on the tax treatment of ICOs, including in relation to cross-border tax issues, for example where a foreign entity conducts an ICO in Australia,” Howe said.

One interesting aspect of last year’s change to Australia’s goods and services tax laws to treat cryptocurrencies the same as money is the principles-based definition adopted for “digital currency,” Matthew Cridland, indirect taxes partner at K&L Gates in Sydney, told Bloomberg Tax in an email March 6.

“It is broad enough to capture new emerging currencies and is not limited to cryptocurrencies. But it is not so broad as to capture anything digital that can be transferred and used to make payments (such as loyalty reward points),” he said.

The ATO has acknowledged that it is reviewing its guidance as it relates to the GST issues with cryptocurrencies. That has been prompted by the December withdrawal of a public ruling. The ruling was redundant after last year’s law change, which overturned the Tax Office’s earlier view that cryptocurrencies couldn’t be treated as money for GST purposes.

To contact the reporter on this story: Peter Hill in Sydney at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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