Taxpayers using cryptocurrency in their businesses, including as a means of paying expenses such as staff or contractors or as a means of deriving income through investments, mining or trading, is becoming more common. After a particularly volatile year for the values of cryptocurrency many taxpayers may have significant gains or losses associated with their cryptocurrency transactions.
With El Salvador and The Central African Republic recognising bitcoin and other cryptocurrencies as legal tender during FY 2022 will the appropriate tax treatment for these gains or losses this financial year deviate from prior years?
Division 755 of Income Tax Assessment Act 1997 (ITAA 1997) sets out the rules governing the treatment of foreign currency gains and losses for tax purposes. Section 995 of ITAA 1997 defines foreign currency as:
…a currency other than Australian currency.
This definition is limited. However, Brennan J in Leask v The Commonwealth [1996] HCA 29; (1996) 187 CLR 579 provided further guidance on what is currency:
Currency consists of notes or coins of denominations expressed as units of account of a country and is issued under the laws of that country for use as a medium of exchange of wealth...
In Tax Determination TD 2014/25 (TD 2014/25) the Commissioner of Federal Taxation (Commissioner) states:
1. ….Bitcoin is not a 'foreign currency' for the purposes of Division 775 of the Income Tax Assessment Act 1997..
33. As bitcoin is not a monetary unit recognised and adopted by the laws of any other sovereign State as the means for discharging monetary obligations for all transactions and payments in a sovereign State, it is not 'foreign currency' for the purposes of Division 775 of the ITAA 1997.
That is, the Commissioner has taken the approach that ‘currency’ means a currency legally recognised and adopted under the laws of a country as the monetary unit and means of discharging monetary obligations for all transactions and payments in that country – as Australian dollars are. Because of this the Commissioner considers that bitcoin, and presumably other cryptocurrencies, do not fall within the definition of foreign currency.
Deputy President McCabe of the Administrative Appeals Tribunal in mid-2020 took a similar approach in Seribu Pty Ltd and Commissioner of Taxation (Taxation) [2020] AATA 1840 (Seribu). In his colourful obiter McCabe draws comparisons between the use of cryptocurrency and the Rum Rebellion of 1908 emphasising “the importance of a stable money supply under the supervision of government.”
In Seribu the taxpayer, a company, made a loss as a result of cryptocurrency transactions. The taxpayer sought to deduct that loss under Division 755 of the ITAA 1997. The dispute between the Commissioner and the taxpayer ultimately fell on whether cryptocurrency was a foreign currency.
Acknowledging the limited definition of foreign currency in section 995 of the ITAA 1997 McCabe determined that the meaning was clear enough, stating at paragraph 29:
the reference to “an Australian currency” is plainly a reference to the unit of exchange established in the Currency Act, and the reference to “[an]other currency” must be interpreted in light of that comparator. It follows the “other currency” in question must be an official currency issued or recognised by a sovereign state.
[Emphasis Added]
Whilst a succinct decision by McCabe the emboldened text above confirms the Commissioner’s interpretation of the law as stated in TD 2014/25. However, this creates questions for taxpayers at the end of FY2022 when foreign states have now recognised bitcoin and other cryptocurrencies as legal tender.
A further complication is whether foreign currency status could extend to all cryptocurrencies or just ‘mainstream’ ones such as bitcoin. The ATO analysis in TD 2014/25 focuses on bitcoin. In Seribu the Commissioner purported that ‘cryptocurrency’ refers to the broader cryptocurrency, including Bitcoin. However, where the requirement is to focus on recognition by a sovereign state this may draw the focus towards the mainstream cryptocurrencies such as bitcoin which, to date, is the only cryptocurrency recognised as legal tender by foreign sovereign states.
Where is cryptocurrency legal tender?
In September 2021 El Salvador became the first country in the world to recognise bitcoin as legal tender. In recent weeks The Central African Republic’s parliament unanimously voted to pass a bill also recognising bitcoin as legal tender. As a result, from FY2022 bitcoin and maybe other cryptocurrencies are currencies recognised and adopted by the laws of another sovereign State and arguably could fall within the definition of ‘foreign currency’ in the ITAA 97.
However, in response to El Salvador enacting legislation the ATO has stated on its website:
We're aware of El Salvador's move to make Bitcoin legal tender. The ATO considers Bitcoin to be a capital gains tax (CGT) asset, and not a foreign currency.
The interpretation by the ATO, whilst limited, therefore stays the same despite the legal basis having been thrown into question. We would caution taxpayers against taking a different position to the ATO prior to official guidance being provided or legislative amendment to the definition of ‘foreign currency’.
Taxpayer’s would be open to scrutiny by the ATO and potential litigation where opposing views are taken. Taxpayers wishing to treat cryptocurrency is a foreign currency for FY2022 should consider engaging with the ATO through a formal process to seek clarity.
If you would like to discuss the appropriate tax treatment of your cryptocurrency holdings or would like assistance in engaging with the ATO contact one of our specialists:
Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327| T +61 3 9611 0105
E: dsmedley@sladen.com.au
