Understanding the regulatory framework surrounding cryptocurrency is crucial for various stakeholders, including tax attorneys, cryptocurrency enthusiasts, and those exploring digital currencies. A recent legal development has sparked discussions about the implications of classifying cryptocurrency as property instead of currency, potentially affecting the tax obligations of crypto traders and investors. The growing interest in cryptocurrency is evident, with around 6.5 million Australians reportedly participating in the digital currency market. Notably, even the President of the United States has a cryptocurrency named after him, Trump Coin.
Data from Independent Reserve reveals a notable increase in cryptocurrency investment among Australians aged over 65, rising from 2 percent in 2019 to 8.2 percent. Many older Australians are now considering cryptocurrency as a viable addition to their self-managed superannuation funds, despite warnings from the Australian Securities and Investments Commission (ASIC) about the high-risk nature of such investments. The most recognized digital currency, Bitcoin, has seen its value soar from roughly $5,000 in 2019 to an astounding $170,000, experiencing considerable fluctuations along the way.
The very characteristics that attract investors to cryptocurrency—its accessibility and the plethora of self-proclaimed experts—are also what raise red flags for regulators. In Australia, the absence of a formal definition of cryptocurrency as legal tender means that many advisors operate without the requirement of holding a financial services license. Despite this, ASIC and the Australian Taxation Office (ATO) have initiated various reviews and reforms related to the expanding fintech sector.
Steven Pettigrove, a partner and head of the blockchain group at Piper Alderman, emphasizes the complexity of advising clients on crypto assets. He notes that a foundational understanding of blockchain technology and associated concepts—such as staking, airdrops, liquidity pools, and hard forks—is essential, as these can lead to significant and unexpected tax implications in light of the ATO’s current interpretations of tax laws. Pettigrove recommends that individuals uncertain about how their cryptocurrency transactions should be treated from a tax perspective seek professional guidance, especially if their activities are substantial or complex. Conversely, casual investors engaging in straightforward crypto trading may not require legal or tax advice, provided they are aware of their tax responsibilities.
A Regulatory Framework Striving for Adaptability
According to ASIC, the legal categorization of crypto assets hinges on their structural characteristics and associated rights. Depending on specific circumstances, these assets could be regarded as interests in managed investment schemes, securities, derivatives, or other financial products that fall under the regulation of an Australian Financial Services License (AFSL). The Australian Law Reform Commission (ALRC) has been examining the financial services regulatory framework in Australia to enhance its adaptability, efficiency, and user-friendliness for both consumers and regulated entities. Their inquiry has focused on the definitions used in corporate and financial services legislation, the design of regulatory frameworks, and the potential restructuring of financial services laws. In January 2024, the ALRC published a report containing 58 recommendations aimed at establishing a more cohesive legislative environment; however, it did not address the classification of crypto assets as a distinct asset class.
For income tax considerations, the ATO treats cryptocurrency as an asset held or traded, in contrast to currencies, shares, or foreign currencies. Recent legislative amendments clarify that cryptocurrencies do not qualify as foreign currencies. The tax implications for Australian residents holding cryptocurrency vary based on how the assets are acquired and held. For instance, if an individual sells or exchanges cryptocurrency as part of a business, it is classified as trading stock, making gains assessable and losses deductible, subject to non-commercial loss regulations. In cases where individuals sell or dispose of cryptocurrency with the intent to profit from a business transaction, those transactions may also be assessable for tax purposes.
If neither of these conditions applies, any profit from the sale or disposal of cryptocurrency may be treated as a capital gain, provided the individual meets certain criteria, such as holding the asset for at least 12 months. In cases where the cryptocurrency is classified as a “personal use asset” and was purchased for A$10,000 or less, any capital losses incurred upon disposal are disregarded. Typically, personal use assets are those cryptocurrencies acquired for immediate consumption rather than long-term holding.
The ATO provides tools such as an online calculator and record-keeping resources to assist taxpayers. It also operates a crypto asset data-matching program, which compares information reported in tax returns with transaction data from designated service providers. This initiative aims to ensure compliance and accuracy in reporting.
Clarification of ATO Requirements
Rob Thomson, Assistant Commissioner at the ATO, clarifies that Bitcoin and other cryptocurrencies are classified as capital gains tax (CGT) assets under income tax law. The tax treatment of these assets is contingent upon how they are acquired, held, and disposed of. Taxpayers must report any gains or losses from crypto transactions in their tax returns and maintain detailed records of each asset and transaction to accurately calculate their tax obligations. Thomson recommends that investors track the time, date, and amount involved in every transaction, along with any associated fees or expenses. He advises clients to regularly export transaction data—preferably every three months—to mitigate the risk of losing access to their accounts and to ensure that they have the necessary documentation before closing any accounts.
Thomson also notes that alerts on tax returns indicate that the ATO has received third-party data related to that section. For example, if a taxpayer sees a notification about cryptocurrency, this implies that data from crypto exchanges has been obtained, highlighting the importance of accurately reporting any relevant activities.
The ATO gathers third-party data from Australian crypto asset exchanges as part of its data-matching program, allowing for cross-referencing against its own records to identify potential discrepancies in reporting. Thomson warns that taxpayers who fail to exercise reasonable care in preparing their tax returns may face administrative penalties should the ATO make an adjustment. The imposition of penalties will depend on the taxpayer’s behavior and understanding of the tax system at the time of filing.
A Potential Shift in Tax Liability for Cryptocurrency
A recent legal case in Victoria could significantly reshape the classification of cryptocurrency for tax purposes. In November 2024, William Noel Wheatley appeared in Melbourne Magistrates’ Court to address charges related to the theft of 81.616 bitcoins, which were uncovered during an investigation into a drug-trafficking operation. Originally valued at $450,000, the current worth of that amount of bitcoin has skyrocketed to over $6.3 million. During the proceedings, Magistrate Michael O’Connell indicated that bitcoin could be categorized as property, similar to Australian dollars. Wheatley’s defense contends that if bitcoin is considered property, it might not incur capital gains tax (CGT), nor would transactions involving bitcoin result in tax liabilities. They argue that bitcoin is information rather than property, challenging the ATO’s classification that has been in place since 2014, which could represent a substantial tax revenue implication estimated between $500 million and $1 billion over the past decade.
The ruling suggested that cryptocurrency should be recognized as property, a decision that Wheatley’s legal team intends to appeal. The magistrate expressed skepticism regarding the argument that cryptocurrency has not yet reached a status comparable to that of money, concluding that its characteristics align sufficiently to classify it as property—specifically as “other intangible property” under applicable statutes. According to the Australian Accounting Standards Board (AASB) 138, “other intangible assets” are identifiable, non-physical entities that possess economic value. Pettigrove asserts that until the Victorian case reaches the High Court, the recognition of property rights for crypto owners will afford them critical protections under property and trust law. A precedent known as Blockchain Tech has established that Bitcoin possesses characteristics of property, a ruling that currently stands as superior authority and is supported by a series of common law principles from other jurisdictions.
