Cryptocurrency and bitcoin: a changing regulatory environment

Whether you’re a tax lawyer, a crypto advocate, or crypto-curious, it pays to know the regulatory landscape. A recent case has also raised whether the prospect of defining cryptocurrency as property rather than money might alter the tax requirements for crypto investors and traders.

With even the President of the United States having a cryptocurrency in his name (Trump Coin, naturally), it’s perhaps unsurprising 6.5 million Australians have invested in the digital currency. The online trading platform, Independent Reserve, indicates Australians aged over 65 have become a growth market for cryptocurrency (from 2 per cent in 2019 to 8.2 per cent). Older Australians are viewing cryptocurrency as an additional investment within their self-managed super despite a warning from the Australian Securities and Investments Commission (ASIC) that cryptocurrency is a “very high-risk” investment.

According to National Seniors Australia, the most popular and long-established cryptocurrency, Bitcoin has risen in value from approximately $5,000 in 2019 to $170,000 recently, with significant peaks and troughs.

The same elements that make cryptocurrency appealing to some investors are the reasons that regulators are concerned. The entry barriers are few, and there are countless crypto “experts” and “advisors” who are not required to hold a financial services licence, since cryptocurrency is not defined as legal tender in Australia. That said, both ASIC and the ATO have been involved in reviews and reforms, both realised and proposed, to address the growing fintech market.

As partner and head of blockchain group at Piper Alderman, Steven Pettigrove represents leading financial institutions, fintechs, digital currency exchanges, startups, venture capital and funds.

He tells LSJ Online, “Advising clients on crypto assets is challenging without at least a high-level understanding of blockchain technology and related concepts like staking, airdrops, liquidity pools and hard forks. These transactions can have significant and unintended tax consequences based on the ATO’s current view of the existing law.”

Pettigrove adds, “Generally speaking, any taxpayer uncertain about how their cryptocurrency activities should be treated for tax purposes should consider seeking professional advice, especially where transactions are substantial, span multiple platforms or involve more complex activities like staking, airdrops or DeFi. For those who engage only occasionally in basic crypto investing or trading, legal or tax advice may not be necessary, so long as they understand the relevant tax obligations.”

A regulatory environment attempting to keep pace

ASIC states the legal status of crypto assets is determined based on their structure and the associated rights. According to the circumstances, crypto assets may constitute interests in managed investment schemes (collective investment vehicles), securities, derivatives, or fall into a category of more generally defined financial products, all of which are subject to AFSL regulation.

The Australian Law Reform Commission (ALRC) oversaw an inquiry into streamlining Australia’s financial services regulatory framework to make it “more adaptive, efficient and navigable for consumers and regulated entities”.

Their focus has been on the design and use of definitions in corporations and financial services legislation, the regulatory design and hierarchy of laws, and the potential to reframe or restructure financial services laws. In January 2024, the ALRC released a report, Confronting Complexity: Reforming Corporations and Financial Services Legislation (ALRC Report 141), containing 58 recommendations aimed at a more cohesive legislative framework. Nonetheless, key proposals did not cover crypto assets as an asset class.

For income tax purposes, the ATO views cryptocurrency as an asset that is held or traded (as opposed to money, shares, or a foreign currency). For income tax purposes, recent amendments to Australia’s tax legislation clarify that cryptocurrencies are not foreign currencies. The tax obligations for Australian residents holding cryptocurrency depend on the nature of their acquisitions and holdings. For example, if an individual is selling or exchanging cryptocurrency as part of their business then cryptocurrency is considered trading stock where gains on the sale are assessable and losses are deductible, subject to non-commercial loss rules.

Individuals who sell or dispose of cryptocurrency with the intention of making a profit as part of a business operation or commercial transaction in an isolated transaction may still be assessable.

If neither of the above conditions apply, a profit on sale or disposal should be treated as a capital gain as long as the taxpayer satisfies the conditions, such as holding the cryptocurrency for at least 12 months before it is disposed of. If the cryptocurrency is a “personal use asset” and it was acquired for A$10,000 or less, its disposal and capital losses are disregarded. Personal use assets typically applies to cryptocurrency that is acquired and used to buy goods or services and not held for lengthy periods.

The ATO offers an online calculator and record-keeping tools. The ATO crypto asset data-matching program matches what is reported in tax returns with data on crypto asset transactions and accounts from designated service providers.

ATO outlines requirements

The ATO’s Assistant Commissioner, Rob Thomson, explains, “As a general rule, Bitcoin and other cryptocurrencies are a capital gains tax (CGT) asset for income tax purposes. Transactions involving crypto assets are subject to the same tax rules as assets generally. The tax treatment will depend on how you acquire, hold, and dispose of the asset. If you dispose of your crypto asset, you are required to report the gains or losses from your transactions in your tax return. You must keep record of each of your crypto assets and every transaction, to work out the amounts to include in your tax return.”

He advises tax lawyers, “At a minimum, crypto investors need to know the time, date and amount of crypto involved for every transaction, along with expenses for fees or legal costs and managing their crypto. You should remind your clients to export their transactions regularly, at least every three months, in case they lose access to their account, and make sure they do this before closing an account.”

Thomson adds, “Where alerts are displayed on your tax return, this usually means that we have third-party data that relates to that section. For example, if you see a message about crypto, this means that we have received data from crypto exchanges about you, so it’s important to consider whether you have an event to report.”

The ATO collects third-party data from Australian-based crypto asset exchanges via the crypto assets data-matching program protocol and other sources. The program enables the ATO to match third-party data with their own information to identify where people and businesses may not be reporting all their information correctly.

Thomson says, “Where we determine that a taxpayer has failed to take reasonable care in the preparation of their tax return, and it results in an adjustment being made by the ATO, the taxpayer becomes liable to an administrative penalty. The imposition of a penalty is based on the taxpayer’s behaviour, knowledge of the tax system and personal circumstances at the time they lodge the return.”

Victorian case may eliminate tax liabilities for crypto

A Victorian criminal case may lead to a dramatic change in how cryptocurrency is defined for tax purposes. In November 2024, William Noel Wheatley faced Melbourne Magistrates’ Court to respond to charges of stealing 81.616 bitcoin from a cryptocurrency wallet that was discovered during investigation of a drug and steroid-trafficking network in January 2019. Originally valued at $450,000, the same amount of bitcoin would exceed $6.3 million today.

During the trial, magistrate Michael O’Connell said that bitcoin was property akin to Australian dollars. According to co-barrister for Wheatley, Adrian Cartland, this could mean bitcoin would not be an asset liable for capital gains tax (CGT), nor would acquisitions and disposals of bitcoin carry tax consequences.

Wheatley’s defence team argued that bitcoin cannot be stolen since it is information, not property. This directly challenges the ATO definition of cryptocurrency as property since 2014, which Cartland estimates was worth between $500 million and $1 billion in CGT and income tax in the decade since.

The judgement included an assertion that cryptocurrency ought to be treated as property, which Wheatley’s defence are appealing.

“I find the argument that cryptocurrency has not yet reached a state that is comfortably analogous to a form of money unpersuasive… In my view, that [being a form of money] is sufficient to enable bitcoin to be characterised as property; that is, to use the words of the statute, as ‘other intangible property’, and I so rule.”

According to the Australian Accounting Standards Board (AASB) 138 – Intangible Assets, “other intangible assets” are identifiable, non-physical assets that lack physical substance but hold economic value for an entity.

Pettigrove says that until and unless the Victorian case goes to the High Court, “The granting of property rights to crypto owners gives them important protections under property and trust law. There is a Supreme Court decision in Victoria called Blockchain Tech which found that Bitcoin has the characteristics of property. This is superior authority for the time being and relies on a long line of common law authorities from other jurisdictions.”