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Cryptocurrency – So what?

By now, nearly everyone has heard of Bitcoin, the cryptocurrency that started them all.  When Bitcoin reached approximately $20,000 AUD in December 2017, I don’t think you could be online without having some sort of cryptocurrency advertising targeting you!

The media spotlight continues to shine on Bitcoin, and as with all media information, it becomes difficult to sort the legitimate news from the hype.

So back to basics – what is cryptocurrency?

‘a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank’.

Simple, right?!?  Let’s break it down.

Cryptocurrency is a digital medium of exchange, it has no intrinsic value, has no physical form and only exists digitally.  These attributes by themselves don’t give the reason why cryptocurrencies are making such an impact.

It is the fact that its supply is not determined by a central bank and the cryptocurrency network is completely decentralised that these currencies are causing such a global uproar.

Why the uproar? Because cryptocurrency is not a “Fiat” currency.  Fiat currencies are those that are declared to be legal tender and are regulated by the government of a country. Our Australian Dollar is a Fiat currency.  Cryptocurrencies are not government declared currencies, there is no government control of the value or issue of any cryptocurrency (at this point).  Some governments are attempting to combat the impact of cryptocurrency – China has banned all exchanges whereas Russia is actually in the process of creating its own cryptocurrency.

The supply of cryptocurrency comes from the blockchain.  Blockchain is a method of recording transactions, in such a way that every transaction is independently verifiable, making a permanent, immutable record that is tamper proof.  No central authority is required, the blockchain is copied and distributed across the entire network – which are computers, owned by you or me, and as the blockchain is synced constantly on the network, failure or loss of data is highly unlikely if not impossible.

Impact on Australian businesses and investors

Cryptocurrencies have opened up new income avenues for both businesses and investors . Businesses can accept bitcoin as payment for goods and services, and investors are able to enter the cryptocurrency markets either as miners (nodes on the network) or as traders.

The taxation impact of using cryptocurrencies in business and investing is being addressed by the ATO.  Initially they have indicated that:

  • Where purchased as an investment, any disposal of cryptocurrency is taxed as a capital gain. The personal use asset exemption will not apply if purchased as an investment.  If held for longer than 12 months, you may be entitled to the CGT discount
  • Acquisition and disposal through the ordinary course of business are treated as ordinary assessable income.  You will need to calculate the arm’s length value of the cryptocurrency and include that value in assessable income, similar to the bartering system
  • Where cryptocurrency traders are in business, the proceeds from the disposal of trading stock are treated as ordinary income
  • Paying wages in cryptocurrency is a fringe benefit and subject to the provisions of the Fringe Benefits Tax Assessment Act 1983
  • Cryptocurrency is not treated as a foreign currency for taxation purposes

Where to from here?

The taxation treatment of cryptocurrency is something we can expect to see change and evolve as the landscape grows and more people and businesses become involved with digital currencies.

For further information, the Australian Tax Office has released this advice:—specifically-bitcoin

If you are interested in knowing more about the taxation consequences of investing or trading Cryptocurrencies, contact your Halpin Partners Client Manager today.

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