Yesterday we published the first half of my submission to the Australian Tax Office (ATO) on cryptocurrency taxation. Today we publish the second half of my submission.
Consultation: Substantiating cryptocurrency taxation events
Are there any practical issues in relation to complying with the taxation obligations that arise for each cryptocurrency to cryptocurrency transaction?
Yes. As mentioned [earlier]. If I’ve purchased Ethereum tokens for example in order to participate in an ICO or to purchase a crypto for another purpose, then this is like using AUD to purchase a Kickstarter project or a crowdfunding opportunity.
If you apply CGT on every crypto-to-crypto transaction then you must also apply CGT on every AUD transaction into any other currency or purchase.
CGT on crypto-to-crypto is the same as charging CGT on money. Even though that might seem silly, as the CGT on the AUD would be miniscule, it’s the same thing.
Just because the crypto markets are going through a price discovery phase doesn’t mean that you should treat them differently to money because there have been significant fiat-converted gains.
If ETH tokens for instance were still ‘worth’ cents on the dollar, would this consultation even be taking place? You need to understand that the core purpose of these crypto isn’t a money making scheme – some are, those tend to be fraudulent projects — but the primary purpose of many of these projects are to build decentralised systems, more efficient processes and technologies.
You only need to look at the Facebook scandal to see the need for decentralised systems where control over things like data lies with the user, not the centralised management of a giant tech company.
Another thing to think about is the purpose of trading crypto in the course of running a business. As you apply trader rules to stocks, you should also apply it to crypto for those that partake in high frequency trading. A set number of trades in a set period of time would quite easily be able to help determine who is or isn’t a ‘trader’. And ‘traders’ that clearly are focused on generating financial profit [in fiat money] should have appropriate taxation rules applied.
However as mentioned above, those that purchase crypto with the intention to use those crypto for personal use to acquire goods and services at a later date, should not have CGT applied as their intention as use is the same as it is with money (AUD).
If I put $1,000 AUD in a 0% interest account and over 50 years my AUD becomes worth $950 AUD because of inflation — you don’t record a capital loss.
Or let’s say over 50 years that AUD becomes worth US$1,200 because of volatility in AUD/USD exchange rates — and then I go and buy a holiday to the US with my increased value AUD/USD then again, you don’t charge CGT on the AUD just because it’s increased in value against the USD.
These are the kinds of comparisons you need to consider with crypto-to-crypto transactions.
If I have 1 ETH and in 10 years it’s become worth 100 ‘CryptoPlane’ tokens because its increased in value against CryptoPlane — and I exchange ETH for CryptoPlane to buy a plane ticket — then this shouldn’t be a CGT event as the intention wasn’t to create a fiat-money profit, it was to use the ETH to buy CryptoPlane to buy a plane ticket for personal use.
The best and most appropriate delineation you need to make is between those buying and selling crypto to then sell back to fiat money to make fiat-profits — and those that are buying and exchanging crypto to use for personal use at a later date continuing to remain within the various crypto ecosystems.
You might think, well how’s this crypto different to stocks? When someone buys a stock the intention is to sell that stock at a later date back to money for a capital gain. The idea isn’t to buy that stock so at a later date you could use that stock to buy the company’s goods and services.
But with crypto, that is the point — hence there are closer similarities to money rather than property or an asset such as a stock. As such the CGT rules shouldn’t apply in the current guise.
You need to take a more specific approach to the different types of crypto and the actions and behaviours of each individual that takes part in the various crypto ecosystems.
Are there any specific factors that you think we should take into account when developing further public advice and guidance about cryptocurrency to cryptocurrency transactions?
Yes, you need to get far more input from actual experts with experience in crypto. People who understand the diversity and development in this space.
At the moment the whole focus seems to be on the short term fiat-converted prices and that it’s an attempt to claim taxes on a new industry that you really don’t understand thoroughly enough.
It’s all about the ‘price’ of crypto in fiat money, when the reality is that crypto is about creating a different, new, system external and separate to the existing financial system we use.
If anything, you should create an ATO Crypto division that creates new, specific rules and regulations for the crypto industry, where taxes can be paid in crypto relating to the intricacies of operating in the crypto space.
But until you have the resources and human capital for that the most significant thing you can do is to differentiate those using crypto as a way to generate fiat profits and those that are using crypto as an alternative system for personal use at a later date.
This isn’t cash, it isn’t stocks, it isn’t property. Hence you can’t just tax it like either, any or all of those things. You need to formulate new rules that are specific to the uniqueness of this new instance — that requires far more investigation, understanding of the wider crypto space.
As mentioned the reality is longer term the whole crypto world will require detailed taxation where different crypto attract different tax treatments — just like exists now for stocks, cash, income, etc.
It’s not something you can just apply one rule for all — that simply doesn’t work, and will drive industry away from Australia rather than attracting industry and talent to Australia as a crypto friendly jurisdiction.
You play a key role in how the world views Australia as either ‘crypto friendly’ or ‘anti crypto’ approaching this with a heavy hand, with limited information and biased views, will quickly turn the tide as Australia being a place to avoid for crypto-based development.
But a reasonable, measured, long-view approach to this new industry will help make Australia a crypto-friendly jurisdiction as well as potentially helping to contribute to domestic economic growth.
These are my own personal views on how the Australian Tax Office should be approaching the crypto revolution. Public consultation is a positive step forward. Hopefully they’ll take on board a common sense approach and interact more with those on the inside of this revolution.
Maybe we’ll get a sensible approach to crypto. Maybe they will help make Australia a ‘crypto friendly’ jurisdiction.
Or maybe they won’t. And maybe they’ll rule with an iron fist and once again put Australia at the end of the queue for this once-in-a-lifetime opportunity.
I also encourage you to put forward your own views on this. The more public consultation the better the outcome (hopefully for all). If you want to have your say you will need to register on the ‘Let’s Talk’ site and make a submission. You can find the site here.
Editor, Secret Crypto Network