Treasury consults on crypto tax legislation
In June this year, Australian Treasurer, Jim Chalmers released a media statement with Assistant Treasurer, Stephen Jones, confirming that the Labour government planned to introduce legislation clarifying the existing tax treatment of digital currencies as a response, in part, to El Salvador's decision to recognize Bitcoin as legal tender.
This week, the Treasury released an exposure draft of the legislation which seeks to clarify that digital currencies (except for CBDCs) will not be taxed as foreign currency under Australian law. The Treasury also released explanatory material outlining the proposed changes.
The Treasury has opened a short consultation period on the draft legislation which will close on 30 September 2022 and coincides with the deadline for responses to the Board of Taxation's broader review of the tax treatment of digital assets and transactions in Australia.
The Treasury's proposed legislation would exclude digital currencies which are legal tender but which are not issued by any Government from the definition of foreign currency for tax purposes. This means that tax payers will not be able to benefit from any preferential tax elections for foreign currency in relation to Bitcoin.
The explanatory material contains a number of interesting observations:
The amendments are intended to ensure that Bitcoin, which has been recognized as legal tender in El Salvador, continues to be treated as a digital currency (and not foreign currency) under tax legislation;
It describes Bitcoin as decentralised and not issued by or controlled by any government and the only current example where there is a potential overlap between the definition of money and digital currency under legislation.
The new definition of digital currency will exclude any digital currency which is issued by or under the authority of the Australian government or a foreign government agency (i.e. CBDCs including, presumably, the e-CNY, Nigeria's e-Naira and Bahamas' Sand Dollar). Accordingly, it appears that Government backed CBDCs will receive preferential tax treatment over stablecoins which will continue to be treated as digital currencies for taxation purposes.
The proposed amendments include a power to make regulations to provide for further exclusions from the definition of foreign currency in future to enable other digital currency-like assets to be excluded through regulation.
The proposed legislation is intended to take effect retrospectively for the purpose of preserving the existing tax treatment of digital currencies (excluding CBDCs) for the 2021-2022 tax year.
While Treasury's move to clarify the existing tax treatment of digital currencies is welcome, the draft legislation raises a number of interesting and unanswered policy questions as to the differential tax status afforded to different types of currencies and the impact of that status on the development of the digital economy. These questions will hopefully be addressed more broadly as part of the Board of Taxation review. Once implemented, these changes will mean that traditional fiat backed currencies and CBDCs will be treated as foreign currency for tax purposes, while privately issued digital currencies (including stablecoins) will not be even where they are adopted as legal tender in a foreign country.
You can review the draft legislation and explanatory materials here. Submissions must be filed by 30 September 2022.