Providing Feedback to the Australian Tax Office (ATO) on Capital Gains Tax (CGT) on Crypto TravelbyBit Follow Apr 1, 2018 · 6 min read

Dear Community, the ATO has asked for feedback on the treatment of cryptocurrencies from a record keeping perspective, I believe this is an opportunity to open the conversation a little wider to question the merits of treating crypto to crypto transactions as CGT events. Please take time to make a submission and provide feedback to ensure our voices are heard and no careless regulation interpretation is pushed through.

Link to the submission site:

https://lets-talk.ato.gov.au/PAG/survey_tools/CryptoFb

The ATO’s vision is to contribute to the economic and social wellbeing of Australians by fostering willing participation in our tax systems.

They aim to achieve taxpayer confidence of the Australian tax and superannuation systems by helping people understand their rights and obligations, improving ease of compliance and access to benefits, and managing non-compliance with the law.

The role the ATO plays in tax collection is important. For example when my kids fall ill, I am thankful we have funded hospitals and other support services. Crypto levels the playing field but to me, this is not about skipping tax obligations through subversion. Working with legislators and regulators to help shape good policy and regulatory practices will help take this technology mainstream.

The ATO has provided tax guidelines identifying cryptocurrencies as property subject to CGT and recently clarified cryptocurrencies trigger CGT events when you interchange them from one crypto to another.

I believe cryptocurrency makes up several completely different types of asset classes and careful thought and consideration should be given to how it should be taxed.

Background:

The cryptocurrency space is still evolving and needs time to mature. There are currencies like Bitcoin which have been around for some time but there are now completely new forms of block chain tokens; utility tokens, security tokens, platform tokens. To take a broad-brush approach to taxing individuals of these different tokens is like bundling a local home owner, builder, property developer and overseas property speculator and saying they are all the same.

Cryptocurrencies: Bitcoin and Litecoin are examples of digital currencies which exist as a medium of exchange and the primary purpose of functioning as currency.

Utility tokens: It is important to understand most of these tokens do not represent any equity in an underlying asset but rather an entitlement to use a future product. Similar to pre-ordering a product on kick starter. And like kick starter some of these products and services may never eventuate.

Security tokens: These are intended to give the buyer, ownership in an underlying investment proposition. These perhaps represent a closer correlation to securities traded on the ASX. Some even come with revenue streams like dividends.

Platform tokens/currencies: Software platforms currencies/tokens enable the owner user access to executing transactions on the platform.

The intention of a taxpayer for buying these assets vary. In the case of utility tokens, a user might buy a token for the ability to contribute to a project which will enable decentralized voting on the block chain and wants to reserve his right to participate in those votes by owning a token. Many of these tokens were purchase with Bitcoin like how you would buy goods and services with Bitcoin. I would argue purchases of such a token with Bitcoin is not a CGT event.

In the case of platform tokens a user might buy these tokens so a user can get access to the underlying technology platform to build a software project. The user might have bought this token when the price was low but now choose to sell this token if he/she suddenly deems there is a more suitable platform now to build the project on due to costs and technical reasons. A profit motive would not be the dominant reason behind a user buying and selling these tokens.

The existence of exchanges or a notional market price does not give many of these tokens value as the volatility is high and liquidity low with little underlying current value in the token themselves. If one could trade a lotto ticket on Ebay, should it attract CGT? And if so should you write off that loss when that ticket amounts to nothing?

I really appreciate the ATO’s early approach to taking a light touch to taxing crypto in their guidelines by providing a AUD 10,000-personal use threshold. It was open enough to help foster growth in this FinTech sector whilst minimizing compliance burdens for small amounts of digital currency. As the ATO now seeks to provide further definition to its tax approach to digital currencies the following principles should be kept in mind:

- Acknowledgement of administrative burdens with crypto transactions and the need to improve ease of compliance

- Acknowledgement that the underlying value of many tokens in themselves are abstract and may not fit the definition of a CGT asset.

- Take care not to stifle growth but instead encourage Fintech innovation to attract investment to Australia

- Adopt a reasonable and consistent approach with the rest of the tax act — let’s define Bitcoin and a selected bucket of transaction focused cryptocurrencies as currencies.

- Take into account the ATO’s ability to manage non-compliance as this affects tax payer’s confidence in the system.

The feedback I will be submitting:

I encourage you to write to the ATO with your own feedback, hopefully based on the points above. Here’s are my key thoughts which I will be submitting:

- Acknowledgement of administrative burdens with crypto transactions and the need to improve ease of compliance

If the ATO’s objective is to foster willing participation in the tax system, many taxpayers cannot possibly imagine keeping track of the little crypto trades and ICO contributions they have made through the course of last year. Record keeping would be a nightmare for various small sums. To be honest many entered these markets with the mindset of investing in something that could perhaps help change the world and for a bit of fun to take a punt and make money. Similar to how you might buy a charity raffle ticket. It’s for fun, it’s for a good cause, it’s a gamble, and we all know the key mantra in crypto “you put in only what you are prepared to lose”.

Putting a CGT requirement over this mantra will both lead to a loss in tax revenue and create an administrative burden.

- Acknowledgement that the underlying value of many tokens in themselves are abstract and may not fit the definition of a CGT asset.

Let’s design some test to define which tokens/currencies could fit the definition of an asset and be subjected to CGT. In my view the majority to do not. Bitcoin for example should be accounted for as a currency as it is used as a medium of exchange. A user can choose to keep savings in various currencies AUD, USD, NZD etc with the intention of using these currencies for personal use. Keeping Bitcoin (BTC) is no different.

- Take care to not stifle growth but instead encourage Fintech innovation to attract investment to Australia

Let’s create a provision that anyone who brings digital currency into Australia to invest or spend in the Australian economy will have tax exemptions/incentives consistent with the ESIC (early stage investment company rules). This will help create jobs and grow the economy. Similar to the Singaporean and Lithuanian approach. The ATO should pay close attention to this as it is where the real opportunity lies for tax revenue optimization via GST and corporate tax.

- reasonable and consistent approach with the rest of the tax act — let’s define Bitcoin and a selected bucket of transaction focused cryptocurrencies as currencies.

Bitcoin should be accounted for as a currency not property. It has the ability to bring much needed competition to the financial services sector and the help bring efficiencies to the Australian economy benefiting small business and consumers. Other tokens are separate asset classes and should be properly understood and regulated as such.

- takes into account the ATO’s ability to manage non-compliance as this affects tax payer’s confidence in the system.

Similar to how company tax needs to be benchmarked against other nations. Tax policies around digital currencies needs to be competitive to create an environment for investment and willing participation in the tax system. We don’t want to create an environment where those who made gains relocate with their gains overseas and those who took careless risk and accumulated losses push these on to the Australian tax system.