New legislation has been enacted to specifically exclude crypto assets from the definition of foreign currency under income tax laws.
The intention of the legislation is to remove uncertainty surrounding crypto assets following the decision of the Government of El Salvador to adopt Bitcoin as a legal tender. The Government policy was that Bitcoin and other digital currencies were never intended to be foreign currencies for Australian income tax purposes.
It applies to income years that commence from 1 July 2021 and subsequent income years, meaning that crypto assets will retain their current status regardless of the decree issued in El Salvador in September 2021 – meaning that you cannot use foreign currency rules in relation to your crypto assets. This removes any uncertainty about the status of these assets for Australian income tax purposes.
Effect of legislation
The legislation effectively means that the income tax treatment of digital currencies will depend on your individual circumstances. Typically, a digital currency such as Bitcoin will be held on capital account.
Where a digital currency is held on capital account, any disposal of that currency would be subject to capital gains tax (CGT) rules. As such, records need to be maintained for crypto asset transactions.
There is some ability for individuals to claim that their digital currency is trading stock for the purposes of income tax laws. However, clearly crypto assets are not always trading stock, even if you are an investment trader. For crypto assets to be considered trading stock, you generally will have to prove that you are conducting a trading business.
Crypto asset providers are being closely monitored by Australian regulators such as ASIC and the Australian Competition and Consumer Commission (ACCC) to ensure they are meeting their statutory obligations. Transactions undertaken by providers without appropriate credit or financial services license may lead to legal action.
There is significant case law in relation to this issue, which we would be happy to look into and apply to your circumstances if you wish.
This information does not constitute financial or legal advice and is for general information purposes only. Please contact DLA Partners for specific advice relating to your particular circumstances.