Australia is rapidly becoming one of the most crypto-friendly nations in the world, with the Australian government launching new initiatives aimed at bringing blockchain technology into the public sector. 

With crypto adoption at an all-time high in Australia, it’s never been easier for Aussie crypto traders to enter the cryptocurrency market. But is the Australian government’s approach to cryptocurrency taxation discouraging new investors?

Stuart Reynolds, Fullstack Advisory

Australian government powers ahead with blockchain implementation

The Australian government has taken a progressively friendlier stance on cryptocurrency and blockchain technology over the last five years. In 2017, the Australian government officially declared its position on cryptocurrency, stating that cryptocurrency is defined as a digital asset and depending on its use, subject to the capital gains tax (CGT) or trading stock rules.

From 2017, the Australian Transaction Reports and Analysis Center (AUSTRAC) implemented new cryptocurrency exchange regulations that allow exchanges to operate in a compliant manner. In addition to AUSTRAC’s effort to regulate the Australian cryptocurrency market, the Australian Securities and Investment Commission (ASIC) has taken proactive measures, building a regulatory framework to govern cryptocurrency tokens, token offerings and crypto-assets. 

The Australian government’s efforts to legitimize and regulate the cryptocurrency and blockchain industry have established a highly crypto-aware society. Survey data published by the Reserve Bank of Australia reveals that over 80% of Australians are aware that cryptocurrency can be used in day-to-day transactions, with 16% of the entire Australian population in possession of some form of cryptocurrency. 

Awareness of the utility of cryptocurrency and blockchain technology isn’t limited to the private sector. The Australian government has reached out to the Australian blockchain community, seeking input on the recently-announced National Blockchain Roadmap.

The Roadmap is designed to establish Australia as a world leader in blockchain technology integration, with the Department of Industry, Science, Energy and Resources anticipating that the blockchain-based Australian contribution to annual global business value will exceed US$175 billion by 2025. 

See related article: Are U.S. regulators finally warming to crypto and digital assets?

The government is also continuing to support the local development of blockchain technology, through initiatives like the R&D Tax Incentive, ESIC and “Accelerating Commercialization” grants.

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Over 80% of Australians are aware that cryptos can be used in day-to-day transactions instead of cash. Photo: Pxfuel

Australian private sector’s crypto adoption 

Cryptocurrency is gaining ground quickly in the Australian consumer ecosystem. In Australia, it’s now possible to buy cryptocurrency at the post office, through crypto ATMs, or via fully-regulated Australian cryptocurrency exchanges. 

The fiat-to-crypto bridge isn’t the only element of the cryptocurrency that has benefited from the Australian government’s progressive stance on crypto adoption, however. It’s now becoming increasingly easy for Australian crypto holders to spend their cryptocurrency in everyday transactions.

In June this year, Coca-Cola Amatil forged a partnership with digital asset integrator Centrapay that allows Australian and New Zealand crypto holders to exchange crypto for beverages at any of the thousands of Coca-Cola vending machines across the country. 

The legitimate use of cryptocurrency for everyday transactions is also speeding up in other Australian sectors. South Australian university students can now use bitcoin to pay for student housing or tuition, while homeowners can legally buy or sell property using cryptocurrency in lieu of Australian dollars. 

Interestingly, the Australian legal system recently recognized cryptocurrency as a valid security for legal expenses. In March 2020, the New South Wales District Court approved a claimant’s cryptocurrency account as security for court costs, which is normally taken as payment into a trust account or as a bank guarantee. 

The tax treatment of crypto in Australia

The use of cryptocurrency as a payment method may be accelerating in Australia, but many potential investors are hesitant to dive into the cryptocurrency market due to concern regarding the tax treatment of cryptocurrency and, due to the new processes involved in cryptocurrency use, the threat of fraud or scams.

The Australian Taxation Office (ATO) takes the tax treatment of cryptocurrencies seriously. In March, the ATO sent through tax warning letters to over 350,000 Australians, warning Australian crypto investors that the disposal of cryptocurrency can result in capital gains tax.

In the warning letter, the ATO noted that the exchange of cryptocurrency for goods, currency, or other cryptocurrency is normally considered a disposal for capital gains tax purposes. Social media feedback on the warning letter indicated that many crypto buyers — even those who had purchased less than $50 AUD worth of crypto — had received the notification. 

The tax warning has raised eyebrows among the Australian cryptocurrency community, with many crypto users unsure of whether or not buying a coffee with Litecoin at a Sydney cafe, for example, is a disposal event subject to the capital gains tax.

It’s important to note that the ATO’s notification regarding cryptocurrency taxation isn’t a condemnation of the use of crypto. In April 2019, the ATO announced that Australian cryptocurrency designated service providers — cryptocurrency exchanges — would be providing the office with bulk data as part of a data matching initiative focused on identifying tax evasion. 

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The Australian Taxation Office has rolled out guidelines on how crypto could be taxed. Photo: Scott Graham

While the ATO cryptocurrency tax treatment letter notes that there are situations in which purchasing goods or services with cryptocurrency may incur CGT, ATO documentation explicitly states that crypto mainly held or used to purchase goods or services for personal use — such as shopping at retailers that accept crypto, booking accommodation, or buying a morning coffee — could be free from CGT under the personal use asset rules. The application of the personal asset rules in practice, however, has been made less clear with many case law examples illustrating a relatively high threshold for proving personal use.

There is an important distinction between cryptocurrency as a personal use asset and an investment. Let’s say, for example, that a crypto user wants to use cryptocurrency to purchase a new laptop from a retailer that offers a discount for cryptocurrency payments.

If this cryptocurrency user purchases $1,000 worth of bitcoin from an Australian cryptocurrency exchange and then uses the crypto to purchase a laptop at the crypto-friendly retailer right away, the cryptocurrency used in the transaction is classified as a personal use asset, and is therefore not subject to CGT.

If a different cryptocurrency user accumulates various cryptocurrencies over an extended period of time with the intent of selling them later for a price, however, CGT is more likely to be applied to the disposal when the user chooses to sell. 

The important distinction between these two cryptocurrency users is that when the second crypto user purchases a laptop at the same crypto-friendly retailer, they’ll be disposing of cryptocurrency purchased as an investment — which will likely create a disposal event subject to CGT.

Future outlook

By all accounts, Australia is an extremely crypto-friendly nation, including from a taxation perspective. While most cryptocurrency disposals are subject to the capital gains tax or the trading stock rules, the Australian Taxation Office takes a nuanced stance on the use of cryptocurrency as a means of purchasing personal goods and services.

The robust nature of Australian cryptocurrency taxation means that it’s possible to create highly effective tax strategies. In many cases, for example, cryptocurrency investments held for more than 12 months benefit from a significant capital gains tax discount. Ultimately, the future of cryptocurrency adoption in Australia relies heavily on education regarding cryptocurrency acquisition, storage, security, use cases and taxation.