How to Have Your Say on Tax and Crypto: Part One

crypto tax laws

The Australian government has already made a number of mistakes when it comes to crypto. The infamous double tax on bitcoin set the country back a number of years. It pushed developers and talented projects away to places like Singapore and Europe.

That’s just recently changed. But again, they’re now making errors in how they deal with the broader crypto opportunity. Applying capital gains tax to every crypto transaction is one massive error.

This is purported to apply to buying goods with crypto and even crypto to crypto exchanges. The logistics of that is simply untenable from the ATO. I can’t see how it will ever work.

However at least the ATO has put out a public consultation on their application of antiquated existing tax law and the new crypto revolution. Through their ‘Let’s Talk’ portal anyone can make a public submission on the treatment of crypto for tax purposes.

I’ve made my submission already. I think they’re making a big error in applying CGT to crypto…in certain situations. In the sense of those only looking to generate fiat money profits, then yes, CGT should apply. But for those seeking to use crypto for personal use, or to access a good or service at a later date, or with the view to use it as money, then you simply can’t apply a broad brush across all crypto.

In fact the future will probably have a dedicated tax law for the crypto ecosystem and the diverse array of crypto within. Some are money, some are assets, and some are simply a rewards system. You can’t apply one tax law to them all — it’s just stupid.

With that said I felt it important to share my feedback to the ATO with you as well. In today’s Money Morning you will see the first half of my feedback. Tomorrow you’ll get the second half.

While you may or may not agree with what I put down, the important thing is providing feedback. And whatever your view, it’s important if you believe in the crypto revolution, that you too provide feedback through the ATO Let’s Talk portal.

For now, enjoy my own personal views on CGT and the ATO’s approach to applying it to crypto…

Consultation: Substantiating cryptocurrency taxation events 

Are there any practical issues that arise in relation to the CGT record-keeping rules, so far as cryptocurrency transactions are concerned?

In terms of record keeping there are sufficient software programs and apps to track and monitor crypto related transaction when simply buying and selling or trading in crypto-to-crypto or crypto-to-fiat transactions. Many if not all of these require manual record keeping and few provide automated systems.

The bigger issue at play here is the practicality of recording the difference between crypto trades and crypto payments. There are a great number of people using crypto to trade in and out of with the long view to generate fiat money (AUD) profits. However there are equally a great number aiming to use crypto for personal use to acquire goods and services down the track.

The treatment and differentiation between profit seekers in fiat money and those looking to access crypto for utility, payment and personal use down the track is important, and the practicality for the ATO and for individuals to create this distinction is not a problem that will be solved in a short period of time. 

Are there any specific factors that you think we should take into account when developing further public advice and guidance about CGT record-keeping for cryptocurrency?

Yes, you need to understand that ‘cryptocurrency’ is too broad a brush to paint this entire industry with. The diversity and spread of crypto is so immense that when you bundle them all under one umbrella it’s akin to bundling stocks, property, cash and bonds under one umbrella.

Some cryptos are solely focused on being a medium-of-exchange i.e. an alternative to cash. Some are focused on providing a utility function for trading energy. Some use a token as an access/reward function within their ecosystem (product, platform, blockchain).

An example of this would be a data storage crypto that uses a token as a utility to gain access to gigabytes of decentralised storage on their global data storage platform. Hence all crypto have differing and varied properties.

The problem you face is that, for example if I hold CryptoX tokens that have been purchased in the ICO to use and access a widely distributed data storage platform and I then dispose of those tokens to use that platform then how can you tax for capital gains unless you convert back to fiat money even though there is no conversion back to fiat money, but the tokens are used for a service?

If the ‘fiat-converted’ value of those tokens is more than when the ICO was launched that simply allows for a greater value proposition when using that platform. That’s an unintentional by product of using the crypto for its intended purpose.

And it’s dependent on factors including the AUD exchange rate to other fiat currency, the demand for that particular token, the value of other crypto (like Ethereum for example), what the other crypto can be used for the development of a particular project, and more.

In other words the utility and use of that token is completely external to the economic and financial system of Australia, or any other jurisdiction for that matter.

However, if those ‘CryptoX’ tokens were purchased in an ICO and ultimately sold back into fiat money (AUD for example) then it’s clear the intention was to realise a capital gain in fiat money. And therefore absolutely should attract capital gains tax.

The point here being is that when certain crypto are purchase that have genuine utility and usage for goods or service within a crypto ecosystem or used for the procurement of personal goods and services, then it really should be treated for tax purposes as money — and last time I checked the AUD doesn’t attract CGT when it fluctuates in value.

But if people use fiat money (AUD) to buy crypto and then sell crypto back into fiat money (AUD) realising a profit (or a loss) then the CGT rules as they stand should absolutely apply.

The by-product of volatile ‘fiat-converted’ prices is ancillary to the purpose and point of crypto — the actual core idea is to not convert back into fiat money but to use these for utility where applicable and money where applicable.

Longer term you’ll find that the diversity of crypto will allow for more specific laws and regulation around types of crypto — i.e. you will be able to apply CGT on a ‘property crypto’ for instance where a particular crypto represents a physical portion of a building perhaps. Or where a crypto token is a claim of equity on a small/medium-sized company.

In short, as the crypto ecosystem evolves you’ll find it becomes a parallel system to the one we use and know today, and you’ll be able to get far more specific with it.

But as it’s in such a nascent space it is a mistake to bundle everything under one umbrella and enforce broad brushes over something that is far more diverse than you’re giving it credit for.

That’s the first half of my submission. Tomorrow we’ll publish the second half. Check your inbox tomorrow for more.

Regards,

Sam Volkering,
Editor, Secret Crypto Network

Sam Volkering

Sam Volkering is Editor for Money Morning and its small-cap, cryptocurrency and technology expert. Find out what he has to say here with all his latest articles.

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