Cryptocurrency according to Manda (2018), is a form of digital currency which was established to perform as a medium of exchange. It utilizes cryptography to protect and authenticate transactions and regulate development of other units of a specific Cryptocurrency. The most famous Cryptocurrency currently include Ethereum and Bitcoin. They work with the help of a Cryptocurrency which permits its users to make transacts and keep finance on the internet in the absence of a requirement of using their financial institutions and names. Payments are made from Cryptocurrency wallets between peers which are in turn documented on the blockchain. Cryptocurrency function by matching pubic codes which link to passwords held privately by the users. These passwords are called key and are employed as a substitute for names (Manda, 2018). Additionally, personal units may be developed via a process known as mining. It encompasses utilizing a complex computer program to resolve online mathematical algorithms or problems that produce coins when they are answered accurately. Furthermore, Cryptocurrency users may purchase them from brokers and spend or keep them through cryptographic wallets.
Cryptocurrency Taxation within Australia
The Australian Taxation Office abbreviated as ATO views Ethereum, Ripple, and Bitcoin and other forms of Cryptocurrency as a type of property. Therefore, it subjects any profit made from selling the Cryptocurrency to capital gain tax (CGT) which it demand should be reported to it regularly. ATO has formulated a general guideline which concentrates on tax results for all individuals transacting with Cryptocurrency. ATO taxes Cryptocurrency when individuals dispose of them through exchange, trade, selling it, using it to acquire commodities, or converting it to other currencies such as Australian dollars. If individuals receive a capital gain while disposing of them, part or all these profits is taxed. Additionally, where individuals receive Cryptocurrency as an investment, they have to be a tax on any profit made when disposing the Cryptocurrency at a more cost than its initial base (De Zilva, 2018). However, various capital losses or gains which emerge while disposing of Cryptocurrency are viewed as personal assets which are not taxed.
Measures to Ensure ATO Taxes Cryptocurrency Correctly
ATO is currently making recording-keeping measures to ensure that it precisely taxes all individuals partaking in Cryptocurrency within Australia by demanding its users maintain various records related to it. Some of these records include the worth of Cryptocurrency regarding Australian dollar during the transaction period and the actual date when the transaction occurred. ATO also requires that records on reasons for the transaction are also demanded as well as details of the second party who bought it which may even entail the Cryptocurrency address. Due to various practical problems arising from taxation Cryptocurrency within Australia, the ATO is consulting with various industries and Cryptocurrency stakeholders. This is to search for opinions regarding taxation problems encountered as a result of record-keeping measures and type of Cryptocurrency which should tax (De Zilva, 2018). However, until this occurs, ATO taxation measures adopted by the ATO are ineffective hence it will be difficult to police payment of tax to all taxpayers partaking in Cryptocurrency world.
Opinion on Measures Adopted by ATO
Cryptocurrency increased intensively with the introduction of Bitcoin in 2017 which dragged numerous opportunities and excitement around it making many individuals easily forget about its taxation. ATO intends to tax almost every Cryptocurrency transaction, exchange, trading, and spending. Additionally, taxpayers are staying ahead of taxation and have adopted measures to evade paying taxes. Only a few individuals are reporting their Cryptocurrency profit yearly, for instance, since 2017, when Bitcoin was launched. Compared to the number of transactions involving Cryptocurrency, ATO has suspected that a big population of its users has been avoiding paying taxes. However, tax avoidance may be because ATO has offered little advice about taxation of Cryptocurrency. Additionally, identification of the specific Cryptocurrency being purchased, exchanged, or sold to enable taxpayers to control their long- or short-term capital profits, wallets, and exchanges are presently not established. They are essential in helping Cryptocurrency users decide the coins to exchange or sell which are subjected to taxation. Thus, ATO is likely to face tax payments defaults since there are no guidelines offered hence taxpayers select various techniques provided they are in line with tax returns.
When determining profit and basis to identify Cryptocurrency exchange and transactions taxation, it is crucial for its users to trail their basis. Basis according to Manda (2018), may be demarcated as the price that taxpayers pay for the ownership or transaction of the Cryptocurrency asset. For instance, on March 30, 2017, Andrew bought six Bitcoins for $7200 where each was $1200. On September 30, 2017, he utilized one Bitcoin to buy products worth $2000 through an online seller. He received an $800 profit during the transaction since he used one Bitcoin for $2000 and initially he had bought it for $1200. Therefore, if tax authorities treat Cryptocurrency, for instance, Bitcoin, as an asset, it would establish a likely accounting problem for taxpayers who utilize it daily to buy commodities. This is because a taxable activity or transaction happens each time that Bitcoin is used to exchange products and services. For example, if Andrew bought a loaf of bread using one Bitcoin which he had used on March 3o, 2017, he would be forced to identify the basis of that one Bitcoin. Furthermore, he would be required to subtract it from the price of a loaf of bread to identify whether any profit was acknowledged. Thus, measures being taken by tax authorities necessitates taxpayers to persistently track their Cryptocurrency basis know any profit or loss received on every Cryptocurrency exchange or transaction they do. Besides, it is evidence that this tax measure requirement may cause accounting problems due to the number of Cryptocurrency transactions people engage in daily.
Consequently, the loss acknowledgment on Cryptocurrency exchange is correspondingly compound. Tax authorities only allow a deduction for losses suffered during in transaction, business, or trade participated for profit purposes. If Andrew had suffered a $120 loss while buying products from the online seller, the type of loss might not be easily deductible. Where he utilizes one Bitcoin daily to transact for commodities and on the other hand, he does not take this as an investment, this form of loss in a non-deductible individual loss. Nevertheless, where he takes Bitcoin as an investment and later cashes it from his venture by utilizing Bitcoin to buy products, this form of loss is deductible investment loss. Therefore, where Cryptocurrency is held for the personal or investment purposes, it may be hard to determine the amount to pay for taxes hence ATO is required to give detailed guidance on the loss, profit, and basis topic.
Since the inception of Cryptocurrency, its value has tremendously been volatile which makes a crucial dissimilarity in recognizing loss or profit. For example, in Andrew case, assuming he bought three Bitcoins on January 10, 2017, for a price of $1130 for every Bitcoin and sixty-five Litecoins on August 10, 2017, each at $60 per coin. He additionally bought eleven Ethereum coins on April 11, 2017, each at $310 per coin. He would be required to maintain a record of the basis and sales price of every transaction involving this Cryptocurrency to accurately determine his profit or loss in every transaction he engages. Additionally, if Andrew bought, for instance, Ethereum in various dates at varying prices, during their sale, he would be needed to identify whether he will be selling a particular Ethereum or utilizing the first-in, first out technique abbreviated as (FIFO). This method is essential in determining if he made any profit or loss during the transaction. Furthermore, this is a default technique which has been tested and produced positive results in tracking basis mainly for securities. Taxpayers in Australia may additionally identify their basis in Cryptocurrency by utilizing specific identification, average cost, and last-in, first out techniques. The predominant thought is that these techniques should be availed specifically for commodities which do not qualify to be taken as security. Therefore, taxpayers who are investing primarily in Cryptocurrency should utilize these approaches since they may be important to determine the amount of tax. Nonetheless, no tax authority in ATO supports this stance. Thus, the measures they are taking to catch all taxpayers in Cryptocurrency universe alone may not be effective.
On the other hand, since the ATO requires taxpayers to track their transactions involving Cryptocurrency carefully and regularly, this is usually faced with various issues. Every Cryptocurrency transaction is required to be stored in a single online wallet where the right inventories should be made to record the date the wallet was created. Where a taxpayer utilizes an account with some varying wallet particulars and later that account is merged into one wallet, it may introduce some challenges. For instance, it may be hard to identify the initial basis of every Cryptocurrency which is being utilized in a consequent transaction. Additionally, the particulars of every Cryptocurrency transaction which occurs in a network should be documented in a public ledger which is known as the Blockchain. This ledger is essential since it stores every transaction conducted to and from the online wallet by including all details such as time and date. The Australian Tax Office lacks Blockchain, and hence it is difficult to catch all individuals using Cryptocurrency for taxation purposes. Blockchains aid taxpayers utilize the information kept to identify Cryptocurrency basis and the holding time. Therefore, ATO should need to develop this form of technology and various online available devices if it wants to catch all the taxpayers partaking in the Cryptocurrency world.
Cryptocurrency as a digital currency has been predominant since the introduction of Bitcoin in 2017. The Australian Taxation Office views all forms of Cryptocurrency as a form of asset w+hich should be taxed. Nonetheless, the measures it has put in place are ineffective and are faced with various problems which makes it unable to catch all individuals partaking in Cryptocurrency world. Numerous opportunities and excitement around the introduction of Bitcoin made individuals forget about taxation, and also the ATO has offered little advice on Cryptocurrency taxation. Requirements by the ATO for Cryptocurrency users to track their basis constantly causing accounting problems. The process of recognizing Cryptocurrency loss is also compound. The value of Cryptocurrency has tremendously been volatile which makes dissimilarity in recognizing loss or profit. ATO taxation measures do not recognize blockchain essential in documenting Cryptocurrency transactions. All these issues affect and make the taxation measures put in place by ATO ineffective and thus, it may not be able to police taxation in Cryptocurrency world.
De Zilva, N. (2018). The evolving tax treatment of cryptocurrencies. Taxation in Australia, 52(7), 372.
Manda, S. (2018). Cryptocurrencies and the potential risks. Development Finance Agenda (DEFA), 4(1), 12-13.
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