Cryptocurrencies And The Law
Cryptocurrencies are digital currencies designed as alternative payment methods to traditional currencies. They are considered highly speculative, and operate independently of government and a central bank. A cryptocurrency unit does not exist as a coin or note but rather a digital token created from code. The processing of cryptocurrency transactions is called “mining”. “Miners” use supercomputers to compete in complex mathematical games. A miner who solves a problem adds a block to a “blockchain” and receives cryptocurrency as a reward. The “blockchain” is an online decentralised ledger that records mining activity, tying together blocks into a chain. There are more than 5000 cryptocurrencies in the world, including Ethereum, XRP, Ripple and Litecoin, with Bitcoin the most common.
Several pieces of legislation are relevant to the regulation of cryptocurrencies in Australia, including the:
- Corporations Act 2001 (regulation of financial products and services);
- Australian Securities and Investments Commission Act 2001 (consumer protection in financial services);
- Competition and Consumer Act 2010 (regulation of non-financial products and services);
- Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (anti-money-laundering and registration of digital currency exchanges);
- Income Tax Assessment Act 1997 (Capital Gains Tax and other obligations)
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 is the only act which provides a definition of cryptocurrency, which it calls “digital currency”. The term means a digital representation of value that:
- functions as a medium of exchange, a store of economic value, or a unit of account;
- is not issued by or under the authority of a government body;
- is interchangeable with money (including through the crediting of an account) and may be used as consideration for the supply of goods and services;
- is generally available to the public without any restriction on its use as consideration.
The energy use, lack of regulation and volatility associated with cryptocurrencies has caused concern worldwide.
Bitcoin has been criticised for its excessive energy footprint. Bitcoin mining is considered extremely difficult, requiring expensive hardware, specific software and extreme amounts of electricity. Its profitability depends on the cost of electricity. The specialised mining hardware device required to mine Bitcoin can consume as much electricity as 500,000 PlayStation 3 devices. Most of the world’s bitcoin mining occurs in China, where the burning of coal provides the main energy source.
Trading platforms for cryptocurrencies are not regulated, leaving consumers without the usual financial protections. In many cases cryptocurrencies are used to facilitate money laundering, ransomware attacks and other financial crimes. Because cryptocurrency systems allow users to remain relatively anonymous and there is no central bank, it is difficult to recover of digital currency stolen by hackers.
Lack of stability
Investing in cryptocurrencies is considered high risk due to the way values can fluctuate significantly over short periods of time. The value depends on how many people are using it at any given time, how easy it is to trade, the perceived vale of the cryptocurrency and its blockchain technology.
Taxes on cryptocurrencies
Australian tax law is adapting to cater for cryptocurrency use.
Capital Gains Tax
Cryptocurrencies are considered assets when calculating Capital Gains Tax (CGT). The payment of CGT may apply when a cryptocurrency is sold or gifted, traded or exchanged, converted into traditional currency, or used to obtain goods or services.
If once cryptocurrency is exchanged for another, one CGT asset is disposed of and one CGT asset is acquired. The market value at the time of the transaction needs to be recorded.
Any capital gain made on a cryptocurrency as an investment is subject to payment of CGT. A discount may apply if the cryptocurrency is held as an investment for 12 months or more.
Some capital gains or losses arising from the disposal of a cryptocurrency for personal use may be disregarded; that is, if the cryptocurrency is not kept or used mainly as an investment, to make profit or to use in a business.
When a business conducts transactions in cryptocurrency, such as when it is a trading, mining or exchanging business, trading stock laws apply rather than CGT laws. Proceeds from the sale of cryptocurrency as trading stock are ordinary income and the costs of acquiring cryptocurrency as trading stock are deductible.
If a business is not a cryptocurrency business but uses cryptocurrency or receives it as payment, the business must record the transactions, in Australian dollars, as it would for any other asset or item used in the business.
If an employee has a valid salary-sacrifice agreement with an employer to receive cryptocurrency as remuneration, the payment is a fringe benefit and subject to fringe benefit tax rules. If there is no such agreement in place, and an employee is paid in cryptocurrency, the employer must meet its pay as you go (PAYG) obligations, using the value of the cryptocurrency in Australian dollars.
For advice or representation in any legal matter, please contact Armstrong Legal.