The phenomenal surges in cryptocurrency prices have put cryptocurrencies such as Bitcoin and Ethereum on the radar of many investors in the mainstream. Those interested in speculating with Bitcoin should be aware of the legal issues that may arise.
Since Bitcoin and cryptocurrencies in general are relatively new as a serious legal concept, the formulation and operation of the regulating laws is still a work in progress.
In Australia, Bitcoin and other cryptocurrencies are not considered as a currency or form of money, but rather are assets that are then bartered for goods and services. This classes them as a capital asset and are thus subject to capital gains tax (CGT).
Cryptocurrencies are however a somewhat unique class of capital asset as they are more readily useable in place of normal currency, with many vendors nationwide accepting them as a form of payment. This opens them up to tax implications that are less likely to be seen when dealing with other capital assets such as property or shares.
A personal use asset?
Bitcoin differs from other capital assets as you’re far more likely to be able to walk to your local convenience store and buy a packet of gum with a Bitcoin than you are with your spare Telstra shares or your two-bedroom apartment.
As of legislation passed in September 2017, GST no longer applies when cryptocurrency is exchanged for a good or service. In this aspect, it is taxed akin to how a foreign currency would be. Because cryptocurrency is usable for day to day transactions, it is possible that it can be deemed as a personal use asset if it is used mainly to purchase items for personal use.
Cryptocurrencies are not personal assets if they are obtained, kept, or used as:
(a) an investment,
(b) to make profit, or
(c) in the course of carrying on a business.
Capital gains made from personal asset cryptocurrencies acquired for less than $10,000 are disregarded for CGT purposes. To be able to prove your cryptocurrency is a personal use asset, it is important to keep records in relation to all your cryptocurrency transactions.
Cryptocurrency as an investment
With the huge spike in prices late last year, purchases of Bitcoin as an investment have become very popular. Any profit made from transactions of cryptocurrencies for the purposes of investment or profit making may be subject to CGT. If you sell your cryptocurrency for a profit, this profit will be considered a capital gain and may be taxable. If you sell it for a loss, this will be considered a capital loss and can be used to offset other capital gains made in the same year.
Purchasing cryptocurrencies as an investment will automatically preclude it from being treated as a personal asset, however if the investment is held for more than a year, you may be entitled to the CGT discount.
Other uses of cryptocurrency
Cryptocurrencies are a versatile asset and have a variety of other uses (such as business transactions and cryptocurrency exchanging) and may have different tax implications in each instance. We recommend seeking advice regarding your specific use of Bitcoin to both minimise tax and avoid breaching any taxation laws.
Despite what their name might suggest, as cryptocurrencies are classified as capital assets rather than a form of currency, this may lead to potential confusion when it comes to the execution of one’s will.
Whilst you might intend it to be grouped in with their cash, it could potentially end up being distributed with you other capital assets such as shares. An estate containing cryptocurrencies needs a sufficiently detailed will to ensure they are distributed correctly.
As this is such a unique form of asset, other potential issues might arise surrounding the technology involved. Banks can be court ordered to transfer savings to an estate executor. In contrast, there is no one person that can be ordered to hand cryptocurrency over.
Whilst the assets can legally be passed on to a beneficiary, without the proper means (private keys and passwords) they might remain inaccessible. If you’re considering entering into this modern market, it is important to make sure your will contains the necessary details to allow these assets to be accessed and transferred.
There remains a lot of uncertainty in this area due to:
(a) A lack of up to date legislation; and
(b) Little guidance provided by the courts.
It is important to make sure your will is comprehensive and up to date with your cryptocurrencies assets, and with tax time upon us, it is essential that you are aware of the tax implications for your cryptocurrency assets.