Capital Gains Tax - Australia

[mannie]

Does anyone know of any new information about how the ATO plans to tax Bitcoin, both GST on transactions and capital gains? I'm interested in how they will treat capital gains. Much about crypto is confusing and strange but acquiring an asset that has no current tax position is particularly strange.

I can only find articles about vague statements from the ATO: http://www.brw.com.au/p/professions/tax_office_gst_crack_down_on_bitcoin_O4BpwSZm9A1yYvVKG32a8O

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[Foxpup]

There is no new information yet, though I hear the ATO will be making an announcement on the subject sometime this financial year. However, rather than a new tax (which would require a change in legislation), this will merely clarify the tax obligations that already exist (which really aren't that confusing).

Just like most other assets not explicitly mentioned by the ATO, bitcoins are a capital asset, not CGT exempt in any way, selling or trading them is a CGT event A1, and long-term gains (since bitcoins are fungible units, you can (and in some cases must) use the first-in first-out rule to determine this) are subject to the CGT discount for individuals (50%) and superannuation funds (33⅓%) (companies are not eligible for the CGT discount). GST applies to Bitcoin transactions exactly the same as it does for AUD transactions, though the buying and selling of bitcoins themselves is not subject to GST as financial instruments are except from GST (though trading fees aren't, I don't think).

[mannie]

There is no new information yet, though I hear the ATO will be making an announcement on the subject sometime this financial year. However, rather than a new tax (which would require a change in legislation), this will merely clarify the tax obligations that already exist (which really aren't that confusing).

Just like most other assets not explicitly mentioned by the ATO, bitcoins are a capital asset, not CGT exempt in any way, selling or trading them is a CGT event A1, and long-term gains (since bitcoins are fungible units, you can (and in some cases must) use the first-in first-out rule to determine this) are subject to the CGT discount for individuals (50%) and superannuation funds (33⅓%) (companies are not eligible for the CGT discount). GST applies to Bitcoin transactions exactly the same as it does for AUD transactions, though the buying and selling of bitcoins themselves is not subject to GST as financial instruments are except from GST (though trading fees aren't, I don't think).

Thanks for your reply. That is certainly helpful. I'm a little naive about tax. I have a few more questions. I wonder if you have any insight into these...

Do you think the CGT event will be only once a crypto is sold for AUD or whenever a crypto is exchanged for another crypto? I ask because the 50% discount only applies to assets held for more than 12 months. Do you think the CGT will be rolled over as mentioned here: http://www.ato.gov.au/General/Capital-gains-tax/

Do you think bitcoins will be considered Australian property if acquired while residing in Australia? I ask because I wonder if it would be possible to, for instance, move to Singapore for a tax year, sell the coins there and realise the CG and avoid tax.

[Foxpup]

Do you think the CGT event will be only once a crypto is sold for AUD or whenever a crypto is exchanged for another crypto? I ask because the 50% discount only applies to assets held for more than 12 months. Do you think the CGT will be rolled over as mentioned here: http://www.ato.gov.au/General/Capital-gains-tax/

Exchanging one cryptocurrency for another would be a CGT event, and I don't see how any rollover would be applicable in that case.

Do you think bitcoins will be considered Australian property if acquired while residing in Australia? I ask because I wonder if it would be possible to, for instance, move to Singapore for a tax year, sell the coins there and realise the CG and avoid tax.

I almost forgot about that. No, bitcoins cannot be considered Australian property as far as I can tell, though I'm not 100% sure of the tax implications of that. As I understand, you have a CGT event when you cease to be an Australian resident, though (I think) it can be deferred until you actually sell the coins (I'm going to have to check on that). Either way, it appears there'll be no tax avoidance for you.

[mannie]

Do you think the CGT event will be only once a crypto is sold for AUD or whenever a crypto is exchanged for another crypto? I ask because the 50% discount only applies to assets held for more than 12 months. Do you think the CGT will be rolled over as mentioned here: http://www.ato.gov.au/General/Capital-gains-tax/

Exchanging one cryptocurrency for another would be a CGT event, and I don't see how any rollover would be applicable in that case.

Do you think bitcoins will be considered Australian property if acquired while residing in Australia? I ask because I wonder if it would be possible to, for instance, move to Singapore for a tax year, sell the coins there and realise the CG and avoid tax.

I almost forgot about that. No, bitcoins cannot be considered Australian property as far as I can tell, though I'm not 100% sure of the tax implications of that. As I understand, you have a CGT event when you cease to be an Australian resident, though (I think) it can be deferred until you actually sell the coins (I'm going to have to check on that). Either way, it appears there'll be no tax avoidance for you.

In the first point (exchanging crypto for crypto) wouldn't the capital gain be in crypto? Would the ATO be asking to be paid a tax in crypto or the AUD equivalent price of that amount of crypto tax? And how would they work out that AUD equivalent if there are multiple exchanges? That doesn't seem workable to me.

I'm not talking about ceasing to be an Australian resident, only not being an Australian resident for tax purposes for that tax year in which you realise the capital gain i.e. living and working in Singapore for that year. Does that change things?

To clarify, I'm an honest tax payer. I have no problem paying tax on capital gains for my ASX securities I just find it a bit rich if ATO try to take a massive slice of a gain from speculative investments in a decentralised cryptocurrency.

Thanks again for taking the time to answer!

[Foxpup]

In the first point (exchanging crypto for crypto) wouldn't the capital gain be in crypto? Would the ATO be asking to be paid a tax in crypto or the AUD equivalent price of that amount of crypto tax? And how would they work out that AUD equivalent if there are multiple exchanges? That doesn't seem workable to me.

No, the capital gain/loss is in AUD, and is equal to the market value of the coins you're buying minus your cost base, as usual. The market value of the coins you're buying is also the cost base if/when you sell or trade those coins.

In other words, if you bought $10k worth of bitcoins, and you trade those for $12k worth of litecoins, you have a capital gain of $2k. If you later sell those litecoins for $15k, you have another capital gain of $3k.

I'm not talking about ceasing to be an Australian resident, only not being an Australian resident for tax purposes for that tax year in which you realise the capital gain i.e. living and working in Singapore for that year. Does that change things?

That's what I meant.

To clarify, I'm an honest tax payer. I have no problem paying tax on capital gains for my ASX securities I just find it a bit rich if ATO try to take a massive slice of a gain from speculative investments in a decentralised cryptocurrency.

The slice is no more massive than the slice they take from securities trading; it just seems that way because the gains are greater.

[mannie]

In the first point (exchanging crypto for crypto) wouldn't the capital gain be in crypto? Would the ATO be asking to be paid a tax in crypto or the AUD equivalent price of that amount of crypto tax? And how would they work out that AUD equivalent if there are multiple exchanges? That doesn't seem workable to me.

No, the capital gain/loss is in AUD, and is equal to the market value of the coins you're buying minus your cost base, as usual. The market value of the coins you're buying is also the cost base if/when you sell or trade those coins.

In other words, if you bought $10k worth of bitcoins, and you trade those for $12k worth of litecoins, you have a capital gain of $2k. If you later sell those litecoins for $15k, you have another capital gain of $3k.

But how is market value calculated when there are multiple exchanges and those exchanges are unregulated and can't be trusted? Is it whatever the margin is at that particular exchange at that time? The exchanges are like the stock markets of the 1920s - rife with insider trading and pump and dump schemes. No protection for the average person. Will that just be considered part of the risk?

I'm not talking about ceasing to be an Australian resident, only not being an Australian resident for tax purposes for that tax year in which you realise the capital gain i.e. living and working in Singapore for that year. Does that change things?

That's what I meant.

Ok. I get it.

To clarify, I'm an honest tax payer. I have no problem paying tax on capital gains for my ASX securities I just find it a bit rich if ATO try to take a massive slice of a gain from speculative investments in a decentralised cryptocurrency.

The slice is no more massive than the slice they take from securities trading; it just seems that way because the gains are greater.

I mean it is massive considering there is no expenditure to regulate trading or protect investors. Unless ASIC tries to get involved in some way. I should have written "vulnerable, unregulated, peer-to-peer decentralised cryptocurrency". If the capital gains are greater, the potential capital losses are greater too. Considering it is vulnerable and unregulated, there is no protection from being gamed by users with power.

Imagine three years down the road, bitcoin are worth $10,000 each. Ordinary Australians and SMSF have considerable positions in the market. Imagine groups collude to dump their holdings, unregulated exchanges dump other people's holdings and the price crashes. Australians panic and sell their holdings, or the unregulated exchanges sell it for them. The ATO would be facing huge capital loss write-offs against gains from traditional assets such as real estate, shares and bonds. There could be a large hole in expected capital gains tax revenue. It seems like a risky asset to allow in to CGT. It would be safer to legislate it out of CGT or consider it gambling.

[Foxpup]

But how is market value calculated when there are multiple exchanges and those exchanges are unregulated and can't be trusted? Is it whatever the margin is at that particular exchange at that time? The exchanges are like the stock markets of the 1920s - rife with insider trading and pump and dump schemes. No protection for the average person. Will that just be considered part of the risk?

As long as an exchange is actively traded, the ATO will accept their price as evidence of market value. In any case, due to arbitrage, the price doesn't actually vary too much between different exchanges, so it doesn't really make much of a difference anyway.

I mean it is massive considering there is no expenditure to regulate trading or protect investors. Unless ASIC tries to get involved in some way. I should have written "vulnerable, unregulated, peer-to-peer decentralised cryptocurrency". If the capital gains are greater, the potential capital losses are greater too. Considering it is vulnerable and unregulated, there is no protection from being gamed by users with power.

You can deduct capital losses just the same as with any other risky asset. It's not the ATO's job to protect people from risky investments.

Imagine three years down the road, bitcoin are worth $10,000 each. Ordinary Australians and SMSF have considerable positions in the market. Imagine groups collude to dump their holdings, unregulated exchanges dump other people's holdings and the price crashes. Australians panic and sell their holdings, or the unregulated exchanges sell it for them. The ATO would be facing huge capital loss write-offs against gains from traditional assets such as real estate, shares and bonds. There could be a large hole in expected capital gains tax revenue. It seems like a risky asset to allow in to CGT. It would be safer to legislate it out of CGT or consider it gambling.

Again, not the ATO's problem. It can't be considered gambling because it's not gambling. Bitcoin is by no means the only risky asset to which CGT applies; risk is irrelevant to CGT.