Taxpayers will benefit from greater certainty over the tax treatment of digital currencies, following the government’s release of law Project September 6, 2022.
The exposure draft follows a announcement made in June 2022 by the Albanian government to clarify that digital currencies, such as Bitcoin and other similar digital currencies, will not be considered foreign currency for tax purposes.
The proposed changes to the law are a direct response to the El Salvador government’s decision to accept Bitcoin as legal tender; a decision that some say impacted whether Bitcoin was a foreign currency for Australian tax purposes.
The exposure draft proposes three key changes to the law:
- amending the existing definition of “digital currency” in the New Tax System (Goods and Services Tax) Act 1999 (GST Act) to include digital currencies that are denominated in a currency that is not issued by, or under the authority of, an Australian government agency or a foreign government agency;
- modifying the definition of foreign currency in the Income Tax Assessment Act 1997 (1997 Act) to exclude digital currencies (as defined in the GST Act); and
- amending the 1997 Act to include the power to make regulations providing for further exclusions from the definition of foreign currency in that Act.
If passed, the effect of the proposed changes will ensure that while government-issued digital currencies may meet the definition of a foreign currency for income tax purposes, this will not extend to digital currencies that have been adopted as legal tender but are non-governmental. -issued (i.e. the El Salvador example).
The amendments are proposed to apply retrospectively from July 1, 2021, although the explanatory materials to the Legislative Exposure Draft indicate that the legislation ‘maintains the status quo before the Salvadoran decree‘, which implies that there is no real change in the law.
Although the explanatory documents also indicate that the tax treatment of digital currencies depends on the individual situation of the taxpayer, it is interesting to note that:
For example, an investment in bitcoin is usually held in capital account. If this is the case, the gains or losses resulting from the sale of bitcoin would be subject to the rules of the CGT.
It’s unclear why the editors felt it necessary to comment on whether a digital asset would typically be held as capital or income. Whether an asset is held as capital or as income is a question of fact and must be considered in light of the applicable case law (of which there is an abundance). It would be inappropriate to assume that there is a typical or “one size fits all” response for all taxpayers.
Either way, while the proposed changes are not universally popular, they will provide taxpayers with greater certainty. Furthermore, the fact that the Exposure Draft leaves open the possibility that government-issued digital currencies may meet the definition of a foreign currency for income tax purposes shows a welcome degree of insight from the from the editors.
Submissions for the Legislative Exposure Draft must be made by September 30, 2022.