Episode 19 — Bitcoin, NFTs and crypto assets: tax treatment explained

In this episode of TaxVibe, Robyn chats with Tracey Dunn, Associate Director, Tax Services, RSM Australia, about the tax implications of acquiring, holding and disposing of digital and crypto assets, including Bitcoin and non-fungible tokens (NFTs).

They cover:

• The basics you should be across in the constantly evolving world of digital assets
• Legal and tax frameworks surrounding these assets (or lack thereof)
• The tax treatment of cryptocurrency

Host: Robyn Jacobson, CTA 
Guest: Tracey Dunn, ATI

For more information about The Tax Institute: https://www.taxinstitute.com.au/

Transcript

 Robyn Jacobson:
Hello, and welcome to TaxVibe, a podcast by The Tax Institute. I'm Robyn Jacobson, the senior advocate at The Tax Institute, and your host of today's podcast. We love the vibe of tax, and here at The Tax Institute, we do tax differently. I'll be chatting with some of the tax profession's great thought leaders, who will share valuable and practical insights you may not hear every day. We hope you enjoy this episode of TaxVibe.

Robyn Jacobson:
I'm joined by Tracey Dunn. Tracey is an associate director in the tax services division of RSM in Perth, and has worked in public practice for over 20 years. Prior to commencing a career in public practice, Tracey worked in commerce in various roles, including banking, logistics management, and international trade. She has significant experience in advising on the application of fringe benefits tax, division 7A and trusts, and regularly presents on taxation topics.

Robyn Jacobson:
Tracey writes extensively on the interpretation of tax legislation for businesses and has been published in a number of publications, including the Australian Financial Review, ABC News, Accountants Daily, Public Accountant Magazine, and Thompson Reuters Weekly Tax Bulletin. Tracey has a bachelor of business accounting, a graduate certificate in commercial law, and a bachelor of laws. I recently saw Tracey in person at our WA Tax Forum in Perth, as she presented on the world of digital assets, Are you ready? Her practical explanations prompted me to invite her to be a guest on TaxVibe. So Tracey, a very well welcome to you.

Tracey Dunn:
Thank you so much for extending the invitation to talk with you on TaxVibe.

Robyn Jacobson:
Pleasure. Look, I've known you for some years now, but when I saw this topic being presented, and it's so topical at the moment, there'd be few accountants in the country that aren't seeing some form of crypto come across their desk. I thought it really is a good opportunity to unpack this and understand it and peel back the layers for people who don't understand cryptocurrency, digital assets, blockchain, and these extraordinary new things called NFTs. So from the original use of blockchain, which, of course, was what launched Bitcoin, and gave it the underlying framework, and we've had this massive avalanche of cryptocurrencies emerging all over the world. And we've now got these NFTs, non-fungible tokens. And I know you got to explain this to us in more detail.

Robyn Jacobson:
We know that these continue to flood the market at an exponential rate. They're incredibly volatile. And I also think back to the way you were describing these in your session, the incomprehensible meets the incomprehensible, being tax law and crypto. And I think that's a great way to describe these two. So I thought we could kick off just by unpacking some of the key terminology that you and I are going to be referring to, because if we get too far into this by using terminology that isn't understood, we're going to lose them straight away. So what is blockchain? What is Bitcoin? What is cryptocurrency? And what are NFTs?

Tracey Dunn:
Okay. So Robyn, I think your analogy about peeling back the layers, blockchain and cryptocurrency in digital assets, you need to approach like an onion and actually peel back each of the layers to work out what it is. So, one of the things that I talked about in my session that you were at was the language. So the distinct language that is used around digital assets, that is quite confusing. It's unique. It's a lot of jargon. So we have blockchain, we have Bitcoin, we have cryptocurrency, and then we have O-coins, and we have stablecoins and we have staking and mining and gas fees and people get overwhelmed and go, well, I'll just switch off. But realistically, if we break things down, we can identify, or we can relate to these digital asset concepts to the everyday concepts that we see with clients who have shares or general banking transactions.

Tracey Dunn:
So blockchain, to try and simplify blockchain, it's distributed ledger technology, which in itself sounds confusing, basically means that the information is stored on multiple computers called nodes, which exist in multiple jurisdictions. And the information exists at the same point in time on every single one of those computers that happens to be on the network. And that's the beauty of blockchain, is that when a transaction occurs on blockchain, the information is gathered together by the nodes and they compete to solve these mathematical equations. So think of it as a game, or a competition to see who wins first, because there is a monetary reward for them if they solve the puzzle first. And when it's solved, that solved puzzle is broadcast to the entire network. So it exists everywhere, which creates jurisdictional issues for those that are using blockchain technology. But we'll set that aside. So basically peer to peer network. So I can transact with you, although I might not know that I'm transacting with you. And the information that relates to our transaction could exist in multiple nodes around the network. But once that information exists, it can't be changed.

Robyn Jacobson:
So in a very crude form, if I could use the analogy of a word document that we have up on, say Office 365, and you and I both have it open, and I make a change to it and it's permanently in markup. So you see my change and I can't undo my change, but we both agree the change is made and the change can only be made if you and I both agree to it?

Tracey Dunn:
Essentially. And if we were entered into a dispute down the track, or somebody wanted to dispute what happened in that very first version, we've got this single source of truth. That information can't be changed. So we could go back to that original transaction and whatever existed at that time will still be there.

Robyn Jacobson:
So whilst this technology underpinned the introduction of the ability for Bitcoin to evolve and all the other cryptocurrencies, it has enormous commercial potential for, I'm thinking of property and insurance and health records and passenger movements and all the dealings we have right across industry.

Tracey Dunn:
Absolutely. And personally, I see where that is where the future is. There's lots of interesting things happening now, but in the future that even using government. So with protecting tax file numbers and unique information that relates to a person's identity, if it's stored in blockchain and can't be changed, then it reduces the risk of identity fraud. So there's some real exciting things that could happen in that space, or that the technology can be used for, as it continues to develop.

Robyn Jacobson:
When you think about people who put forward academic qualifications, or university qualifications, to say that they have a doctorate, or they have a particular interest, or skill in some place, and you've always had to go back and verify that with the issuer of that qualification, with that institution, with blockchain, you would just know that to be true.

Tracey Dunn:
Yeah, absolutely. And that's what is really exciting about it. And you think from a perspective of, you mentioned property. So property records, we went through a period of time where there was fraud where people were claiming to be the owner of property. The actual owner might be overseas. Somebody was able to come in and pretend to be the owner, sell the property. The original owner actually comes back and finds that their property's been sold and there's nothing that they can do about it. So if you have records that are recorded on blockchain, then it makes it far more difficult for people to engage in that kind of fraudulent activity, which I think is really exciting.

Robyn Jacobson:
And I want to, of course, get us back to our core topic today, being crypto and NFTs. But from the perspective of the accounting profession, I think it really raises interesting questions about the future of the auditors, because I can see them in the future transitioning to becoming experts in all of this, where they're no longer verifying records, because the records are known to be true, but they become experts in helping to administer these sorts of systems.

Tracey Dunn:
Definitely. I think that this is a game changer for the industry. And one of the really important things, if we go back to the fundamentals is that we are now in a situation where at least one in four Australians, they either have crypto, or they have had crypto, and those numbers are going to continue to increase. So for agents, that means one in four of your clients will have a crypto transaction. So unless you build your skills and you understand the technology and the tax issues that impact on the use of that technology, you could find that you can't actually service your client base.

Robyn Jacobson:
So let's move into what is Bitcoin and cryptocurrency, and how is it different from blockchain?

Tracey Dunn:
So blockchain is that technology that underpins cryptocurrency. So blockchain was the technology that the original developers introduced to be the foundation for Bitcoin. In 2014, we had Ethereum come into the market. And Ethereum was really exciting because not only was Ethereum an alternative form of cryptocurrency, it was a platform that also allowed advanced applications to run on top of the Ethereum platform. So this is where the exciting things for more exciting developments come in, where we've got NFTs, non-fungible tokens, we've got decentralized autonomous organizations, we've got smart contracts, we've got all of these other exciting things and these amazing minds out there in the world that are creating things that faster than we can keep up with.

Robyn Jacobson:
Two questions come to mind immediately on this, Tracey, the first is, can you explain why they're so volatile? And secondly, how can anyone trust what's real? It's all virtual and intangible anyway, but how do we know what's real and what's a scam?

Tracey Dunn:
Well, that's a really good question, Robyn, and I'm not sure that I can answer it, because it's not regulated. There's no regulation in Australia, and there's no consistent regulations throughout the world. We have jurisdictions globally that they realize the potential of blockchain and the risks that are involved, and all of these different jurisdictions are working towards bringing in their own rules and regulations around cryptocurrency, because one of those real risks is scams, and the market is extremely volatile. So I'm sure we'll discuss this later, but cryptocurrency currently isn't recognized as a currency. So it's not something that generally people will transact with. But if I was to transact with you in cryptocurrency, there's still value there, because if you wanted the cryptocurrency that I had, it's value is in what you are prepared to pay for it. So it's an unregulated market. The value is in what another person wants to exchange at the time. And it's very volatile.

Robyn Jacobson:
And if we think about property, if I'm going to engage an agent to sell my property for me to you, the buyer, the agent has to be registered and hold a real estate license. If I'm going to engage a broker, or a financial advisor to assist me to move in or out of the share market, that person needs to hold an Australian financial services license, but in the world of crypto, none of that exists.

Tracey Dunn:
No, there are some rules. So if you are going to issue cryptocurrency in Australia, then you are required to have an AFSL. If you operate a digital exchange in Australia and you are going to advise or transact or offer a platform to exchange cryptocurrency and digital assets in Australia, then you may be required to have an AFSL, but it's unregulated. And there is nothing preventing you from transacting on a platform that exists in another jurisdiction. So you just google cryptocurrency, or download an app onto your phone, and nobody is required to give you advice. So there's very few barriers to people actually buying, selling, exchanging in cryptocurrency. And there's a real lack of information for consumers and investors.

Robyn Jacobson:
This volatility, we've all seen the prices skyrocket and then plummet almost to the same extent, and then they skyrocket again. We've heard of people that have made extraordinary wealth out of particularly low entry points. So they happened to enter when the market was right down, or they'd held it since the very early days and their wealth has just blossomed out of this. So we are starting to hear stories now of people that are experiencing those extreme highs and lows, much more volatile than the Australian share market. And I also think of the stories we've heard about people that have lost their digital passwords. And there was a report out of the UK where a fellow had lost his digital password. It was on the hard disc of a computer, which he threw out. It was years old. And he had long forgotten that the password was sitting on that computer.

Robyn Jacobson:
It ended up in landfill, his local tip. And for quite some time, I think he was ultimately unsuccessful, was trying to get court orders to order the tip to allow him to basically dig this entire physical area up so that he could try and retrieve this computer. Because of course, in the meantime, his wealth had astronomically blossomed. So we are going to continue to hear stories like this.

Tracey Dunn:
Absolutely. And that is a real risk. I think that there's a lot of people that aren't aware of that. So you keep your cryptocurrency, you can keep it on a hard wallet or a soft wallet. So your soft wallet might be an app on your phone. A hard wallet might look like a credit card, or there's lots of different providers. I have one that looks like a USB. And if I put that in my bag, I would probably never find it again. And when you use a wallet, this is one of the really interesting things, is that not only do you have your password or your pin to get into your wallet, and if you put your cryptocurrency on your wallet, that's where it's stored.

Tracey Dunn:
And if you set up an account on a wallet, it will give you multiple warnings saying, you must ensure you retain your password and your seed phrase in a secure spot where you know where to find it, because if you lose it and you don't have access to either your password or your seed phrase, you will lose everything that's on your wallet. It will not be able to be recovered. And a seed phrase, so you have your initial password and then you have your seed phrase, which is your backup. So if you forget your password, you can use your seed phrase. Well, a seed phrase is, I have one that's 12 words in sequence. So it gives you 12 words in sequence that you have to write down. And then it shows you on the screen, you have to verify in order each of those words, and you have to keep that little piece of paper somewhere safe.

Robyn Jacobson:
So this isn't okay. So popping down to your local bank branch, if you happen to forget your account number and saying, can I have access to my funds, please?

Tracey Dunn:
No. So if you lose it, or the dog eats it, or your house burns down, it's gone.

Robyn Jacobson:
So you want to have secure storage and backups in multiple places, but obviously very secure.

Tracey Dunn:
Absolutely.

Robyn Jacobson:
So let's move now to the legal and the regulatory framework around this. You've explained, at least within the Australian exchanges, you need to have an Australian financial services license to advise on these types of assets, or to run the exchanges themselves, but that doesn't extend to overseas exchanges. And that wouldn't apply if you and I are dealing privately with each other outside someone who is providing advice to us. So in terms of the protection for consumers, there's an old adage, it looks too good to be true. Is this one of those cases?

Tracey Dunn:
Pretty much. In very simple terms, yes. There's a huge amount of risk involved. So if people are not getting advice, there are limited protections unless the Australian consumer law applies as this being, say misleading a deceptive conduct, but for your average consumer, how are they going to be able to... There'll be challenges in actually bringing an action under the Australian consumer law, especially if they can't even identify who they're transacting with.

Robyn Jacobson:
We'll get onto the ATO properly in a moment, but we've also had many stories and reports about ATO concerns around self-manage superannuation funds, holding crypto or holding too high proportion of their assets in crypto. What are your thoughts around that?

Tracey Dunn:
I think that would be a question that I would throw for a financial advisor as to who was advising the self-managed super fund trustee. Now, I believe I don't work with self-managed super funds, but I believe that there are now caps on the percentage of assets, a self-managed super fund can hold in cryptocurrency, which is, for me personally, just from my own personal perspective, I think that having caps is a good thing because this is somebody's retirement and the crypto markets are so volatile. Now I play around with crypto, just for my own personal fun and knowledge. I have some crypto, not much, it's dropped 10% in the last two days. So, when you're talking about your retirement, to have that kind of volatility, and some of the crypto I've seen drop 40% in the space of two weeks.

Robyn Jacobson:
And yet if the share market did that, and it has done that at times through the GFC and the pandemic and so on, that would be front page headlines.

Tracey Dunn:
Absolutely.

Robyn Jacobson:
Okay. We're also seeing quite an increased use commercially. So when it first came on the market, there were people who were mining it. So these are the people who were solving the mathematical puzzles and basically creating these solutions, which became the Bitcoin. And then we had people who were trading in it and buying it and selling it, or people who were holding it for investment. But we're now seeing, you can buy things with it. You can pay for professional services, you can buy property, and we certainly, you can buy cars with it because we've seen that in one of the particular car manufacturers. So increasingly this is starting to become much more commonplace.

Tracey Dunn:
Absolutely, it is quite mainstream now. And I expect that it will continue to. There's a lot of businesses and organizations that realize that people have cryptocurrency and want to be able to transact in cryptocurrency. So they're providing that as a option.

Robyn Jacobson:
What the market wants, the market responds to.

Tracey Dunn:
Yeah. And there's no regulations preventing them from doing so.

Robyn Jacobson:
So let's talk about the ATO. They've put out some guidance, and that's been in the form of some taxation determinations, as well as informal web guidance. And back in 2014, they did issue four determinations, basically setting out their views on what they thought of Bitcoin and similar cryptocurrencies and digital assets. In terms of where the ATO sits on this, and also whether or not we can treat this as currency, is we know that many people would like to think of it as a form of currency, but what is it from a taxation perspective? Is it money or is it more akin to shares like a CGT asset?

Tracey Dunn:
So the ATO take the view that it is a CGT asset. And I would agree with that view. Essentially cryptocurrency is property. And whilst there hasn't been any judicial guidance in Australia on that question, there has been now I believe around four cases in international jurisdictions, the UK, Singapore, the New Zealand that have all landed at the same spot that cryptocurrency is property. So therefore if it's property, CGT asset not a currency. And if you look at an AAT case in 2020, Seribu Pty Ltd and the commissioner of taxation, that case dealt with the question of whether or not cryptocurrency was foreign currency. And the AAT, and whilst it's only an administrative appeals tribunal decision, held that it was not foreign currency. It was a CTT asset.

Robyn Jacobson:
In the ATO's original reasoning, one of the things they set out was it couldn't be a form of currency because there are only two forms of currency. We've either got Australian local currency, or we have foreign currency. And it can't be Australian currency because our official currency is the Australian dollar. And for it to be a foreign currency, it would need to be recognized as the country's currency, or a form of currency by a sovereign state. And back in 2014, there was no country in the world that was recognizing Bitcoin, or any other cryptocurrency as a form of currency for that sovereign state. Now in September, of 2021, El Salvador became the first country in the world, and I'm not sure that there are too many others that have joined them since, to recognize Bitcoin as a currency. And just looking at some media reports on this, they've spent hundreds of millions of dollars rolling out Bitcoin ATMs.

Robyn Jacobson:
You think of walking down the street and arranging money to be transferred through an ATM on the wall. They've bought Bitcoin at a government level on the basis that it's going to increase. And they're looking at rolling this out across their community and amongst their traders who have to get on board. And it is something that the ATO I imagine will need to consider as part of this, that as countries do start to recognize it, does that change the ATO's position, which is currently that it is not foreign currency, and it's certainly not Australian currency. Now, I don't know that the ATO position's going to change in a hurry and that's, of course, for them to set out any views on that, but it raises very interesting questions if more and more countries do get on board.

Tracey Dunn:
It certainly does. And I did hear quite a bit of chatter around that issue when El Salvador did make the decision to have Bitcoin as a currency, but there hasn't really been any discussion that I've seen that's substantive since then. And there's been nothing from the ATO. And when I look at what's happening on an international basis, the larger countries are still looking at cryptocurrency as a form of property. They're not recognizing it as a form of currency. I suspect that we won't have any clear position on that until either the ATO provides formal guidance, or somebody challenges it in a court.

Robyn Jacobson:
And it's not as though we've got dozens of OCD countries jumping on board, saying we are doing the same as El Salvador. They seem to be taking a quite cautionary approach as well.

Tracey Dunn:
Absolutely. I have not seen any other country that has made a declaration that cryptocurrency is foreign currency under their legislation.

Robyn Jacobson:
So let's now turn to the tax treatment. If I go out and I buy some Bitcoin today and I hold it for a period of time, it goes up in value. And then I sell it because I either want to exchange it for another form of cryptocurrency, or because I want to cash it out and buy something with it. What's my tax position?

Tracey Dunn:
Well, generally, and this is one of these circumstances that we need to peel back the layers. We need to have a look at how did you acquire that cryptocurrency and what was your intent? So if your intent was to hold the currency, to exchange it in the future for something of value and, or to hold it with the intent that it would increase in value, so you could eventually exchange it, then it's more than likely of, I'll just say it is a CGT asset. And the implications for you is that you will have a accessible capital gain on the disposal.

Tracey Dunn:
So it will be like any other CGT asset. And you'll have a look at, do I have a CGT asset? Yes, it's been disposed of, is the disposal value less than the cost base? Yes. I've made an accessible capital gain. Do I have any capital losses that I can offset? How long have I held it for? Have I held that CGT asset for longer than 12 months? Because if it's a CGT asset, if you've held it for longer than 12 months, and it's on an investment account, capital account, then you're going to be eligible for your 50% CGT discount.

Robyn Jacobson:
The personal use asset is an interesting one because I've often heard people say, oh, yes, I can disregard the capital gain, or the capital losses, the case may be, depending which way you've gone, because it's a personal use asset, and I only bought it for a very small amount, but we've got to remember that the personal use asset rule is where you are holding onto the asset for your personal use and enjoyment. So it's one thing if you bought the crypto with the intent that you are going to hang onto it and the gain that you've made, you are going to go out and buy a holiday with it, or pay for your wedding, or do something, I don't think your wedding's probably more expensive for a crypto, but you know what I mean?

Robyn Jacobson:
But if instead it was a case of buying an asset, waiting for it to go up in value, cashing it out and then spending it on your personal use item, why is it any different to buying some shares that have gone up in value and then using the profit from the shares to pay for the holiday, or the wedding, or the private expenditure that you wanted? So, I think consider there are often misunderstandings about exactly how broad or narrow this personal use asset exemption can be.

Tracey Dunn:
Absolutely. I think there's this misunderstanding that people look at cryptocurrency and think of it, that it is the same as their bank account, if they can buy and sell things, which is actually quite limited in Australia at the moment, then it looks and smells like a bank account. So maybe it is a bank account, but in reality, it's not. It's no different than buying shares. If you are buying the cryptocurrency because you can see how volatile the market is, and you're hoping that you're going to have a 2000% increase on what your purchase price was. Then your intention is no different than buying a share or another investment asset. You buy it with the speculative intention that you're going to make money. And once you've converted it to fiat currency, then you've got your personal use asset because it's just your cash in a bank that you then go and spend on personal use items.

Tracey Dunn:
That said, there may still be occasions where cryptocurrency is a personal use asset, very limited. But if I think of an example that if say a cryptocurrency is minted and it's specifically for use in an online gain. So for you to be able to get into, and use that platform, but you can't then convert it back to fiat currency or any other form of currency, and it's used to play a game. Then that might be a personal use asset, because the reason that you purchase that particular coin is for your personal use and enjoyment, and you can't exchange it for something else of value.

Robyn Jacobson:
You've been referring to this concept called fiat currency. Some people may not be familiar with what that means.

Tracey Dunn:
Australian dollars.

Robyn Jacobson:
So our local currency.

Tracey Dunn:
Our local currency. Yes, apologies.

Robyn Jacobson:
No, that's okay. Now there'll also be some people who are what we call miners or traders, and it's still a CGT asset because, of course, trading stock is a CGT asset, but we have a different set of tax rules that may apply to them.

Tracey Dunn:
Yes we do. And that takes us into a whole new area. So you touched before on miners, and miners are different to traders. So if I start with traders, because we started with a CTG asset and we've got the different concepts between capital and revenue. So if you had shares, you might hold them on capital account, you might hold them on revenue account. If they're on revenue account and you are trading, you are looking at the volume of your transactions. So same thing with cryptocurrency, you would need to go through that. And [inaudible 00:29:01] of, are you carrying on a business to see whether you are trading?

Tracey Dunn:
Mining is different. So mining is a reward for a service. So not necessarily trading stock, but might be once you have received the reward, again, you have to look at what the underlying transaction is. You could have a miner that's just a person that just happens to have a really sophisticated computer that happens to be lucky enough to solve the mathematical equation, or you could have a mining pool where a number of large organizations that have a massive amount of computational power use their power, they pull it to get the rewards of solving these mathematical problems, because when they solve the problems, they get a reward of cryptocurrency. So that initial reward is a reward for service and it's revenue, but then they've got their underlying asset that is either going to be a CGT asset, or it's going to be held on capital account, or it's going to be trading stock depending on how they use it.

Robyn Jacobson:
I don't think we can get our heads around the computational power that's required. I remember the early days there was talk that all the low hanging fruit was essentially being taken. So the easy solutions it's like getting the first 50% in an exam, it's always easier than the second 50%. And so a home computer in the very early days was capable of being able to generate Bitcoin to mine it and find those mathematical solutions to the puzzles. But it's got to the point now where the power needed, there was talk about it consuming more electricity than the whole of New Zealand consumes an entire year. It's extraordinary.

Tracey Dunn:
Yes it is. And that's absolutely correct, is the amount of power that is required to mine Bitcoin in 12 months is more than many small countries consume in a whole year. So it's not very environmentally friendly.

Robyn Jacobson:
I have to say, this will not be of great attraction to people that are very mindful of the environmental impact.

Tracey Dunn:
Well, this is where the proof of stake, which is a new method of authentication, which uses holdings of coins is coming into play. So it's a different verification method that is more environmentally friendly, and we are starting to see, and it was one of the topics in the Senate inquiry into Australia as a innovation hub, was potentially providing a tax incentive to miners, to develop more environmentally friendly methods of verifying cryptocurrency transactions.

Robyn Jacobson:
I want to discuss with you the way the ATO approaches this, because perhaps for a long time, there was a perception that the ATO couldn't possibly see this, it's off their radar, how do they know what I'm up to? I can make profits. And as long as I'm not getting back into Australian dollars, how would the ATO know? I attended a conference many years ago where someone from the ATO was speaking about this, and it was the early days of Bitcoin being rolled out. And the way they described it was, imagine you have a highway and on every major, or even a freeway, probably a better analogy, but on your freeway or your highway, you have entrances and exit points. So there's the entry ramp and the exit ramp. And back then the ATO was saying that they couldn't always have visibility over who was on the highway itself, that they could see when people were jumping on or jumping off it.

Robyn Jacobson:
So for example, if I take money out of my Australian bank account, and we're talking about Aussie dollars, and I go and buy a cryptocurrency with it, they will see the withdrawal from the bank account. They may not know what I do with the crypto once I'm in crypto world, particularly where I'm in foreign exchanges now, as opposed to the Australian ones, but they may well see what I'm doing if I then cash it out and go and buy property with it, or buy a car with it in Australia. So again, I'm interested in your thoughts about how's the ATO going with all this? And it's not that you're, of course, representing the ATO, but they're getting better at identifying when people are engaged in these transactions. And anyone who thinks that, oh, don't worry, the ATO won't see it. I think they need to think twice about this.

Tracey Dunn:
I agree completely. That ATO have extremely sophisticated data matching and data accumulation programs. So anyone who thinks that they're going to fly under the radar with cryptocurrency transactions, good luck to you. Well, you've probably going to need more than good luck. So in Australia, we have laws now that give the ATO powers with their data matching. So I'll take a step back with that, or say that with digital service providers and digital currency exchanges, now if they have a presence in Australia, so they operate a business in Australia, or they have a permanent establishment here, they're required to register with ASIC as a digital service provider.

Tracey Dunn:
The ATO's data matching program requires digital service providers to provide information to the ATO in relation to cryptocurrency and digital asset transactions. There's a lot of digital service providers in Australia, and that might not just be limited to a digital currency exchange, but also accounting platforms that are tracking information between banks and reporting accounting information, or there's bank transactions as you mentioned about the highway analogy. So it still allows the ATO if you have a taxpayer who is dealing with a digital currency exchange in an offshore jurisdiction, that the ATO still has visibility of where the money is transferred from Australian bank account to this offshore digital currency exchange. I see on many pre-filled reports, quite a lot of them these days, says the ATO has information that you have had a cryptocurrency transaction this year.

Robyn Jacobson:
And I think it's important to call out that where you have someone who swaps one form of cryptocurrency for another, this is no different to say selling the HP shares and buying Telstra shares. You may still be in the crypto environment, but you have exchanged one CGT asset for another. So at a tax level, you've had a CGT event, it creates a taxing point.

Tracey Dunn:
Yes it does. And because of the volatility of the crypto markets, you might find that people have multiple transactions, and you might have people who are not only doing these exchanges between one form of cryptocurrency and another, but they might also be staking their currency and getting staking or rewards, which is like interest. They might be using decentralized finance platforms and investing, or purchasing these financial products in cryptocurrency. And they can have multiple CTG events that are going on, because it's on a platform they may not actually be aware that they may have multiple transactions that are going on. And that then leads us to an issue with record keeping and working out what is the actual tax position? What is the net capital gain or loss?

Robyn Jacobson:
Final discussion, because there's so much for everyone to think about as they're getting into tax time again for 2022, not far away now. NFTs, that's just a whole new layer, whole new set of rules. So what's going on with these?

Tracey Dunn:
Okay. So a non-fungible token, NFT, it's non-fungible. So it's not like crypto, but it's an asset that you own. So it does relate to you and it can relate to digital art, music, it can relate to an actual physical, underlying asset. It might represent membership to an online community, and it might have then further rights that are attached because of your membership to that online community. So in a very basic form, now I've mentored my own NFTs. It wasn't hard. I used a platform and I connected a wallet, and that might sound like strange language, but it was actually really easy. And I uploaded a photo and then I pressed a button that said mint NFT. And there it was, it was created.

Tracey Dunn:
So my image, that was actually a drawing that I did in 1987, is out there on blockchain. And if I want to sell it, then I can set up in that account a base price, so a floor price for my NFT, and I can attach conditions. So I can say, well, if somebody buys it and then continues to trade in that NFT me as the original artist receives a 2.5% commission on every trade.

Robyn Jacobson:
Are you trading the right to the drawing you made, or the right to be able to access the drawing that you made?

Tracey Dunn:
Well, it depends. It depends on what rights that you attach to that NFT.

Robyn Jacobson:
So you can create whatever rights you want?

Tracey Dunn:
Absolutely.

Robyn Jacobson:
Now the tax treatment of these, because they [inaudible 00:38:27] grow in popularity, again, we seem to have volatility. We seem to have an attraction to NFTs because someone famous has one, or is a member of one of these exclusive communities, and that can push the price up.

Tracey Dunn:
Yes. And this is one of the exciting things that I've spoken with you about before, and it's these multiple layers that can attach to an NFT. And to work out the tax treatment, you actually have to strip back those layers and look at what is the original underlying NFT? So what were the rights that were attached to that? And I'll use the example that I used in my presentation. It was an NFT that on the purchase, you had exclusive rights to the digital artwork that was represented by that NFT. So once it was yours, it was yours to deal with as you please. And with that, it gave you an exclusive right to a rather exclusive club. And that's really where the value came. So if you traded that NFT with another person for value, then you've got a potential disposal of a CGT asset.

Tracey Dunn:
But if you held onto that asset, there was additional rights that came with that. And it might be that you were entitled to an airdrop of this new currency that was minted, that was exclusive to your club. It might give you rights to exclusive club membership that has other rights. So it might be something that is of an income nature. It might give you the rights to obtain another CTG asset for no cost. So you've then got to have a look at what is the underlying asset and what are the assets, or revenue items that I've received, because I own that original non-fungible token. And that to me is really, really interesting, because you have multiple layers that you have to peel away and then try and identify it, match it up to something that is in the old tax world that might be a right to income, the right to a share issue and things like that.

Robyn Jacobson:
Can we turn now as a final discussion, inheriting these sorts of assets. So someone passes away, they've got wealth in these, let's assume that we do have the passwords or the details of the digital wallets and so on. So it's not as though they're lost and we can just ignore it. And I'm not even sure what we do if we can't locate those things. Arguably there's perhaps a capital loss that happens on the passing, but we know we disregard capital losses on death. So it's an interesting one. They probably just go to the grave with them, but let's assume we do have all the ability to access the information. It's an interesting question as to how beneficiaries or estates then have to deal with these sorts of assets, because there's going to be enormous wealth in them.

Tracey Dunn:
Potentially. And it's a really interesting area because how do you, if there's no centralized register where you can search to see if somebody actually holds these assets, how do you identify where the wallets are? And assuming somebody has left the passwords and you can access them, then yes, an executor of an estate is then going to have to work out, how do you deal with that within the estate? What does a will say? Was the cryptocurrency left to a specific beneficiary, or does it just form part of the estate? Are you required to realize it to meet estate costs? And then if you've realize it's not cryptocurrency anymore, it's just normal currency. So some really interesting issues there. And then you might have recipient beneficiaries under a will. How do you transfer the cryptocurrency to them?

Robyn Jacobson:
Particularly if that beneficiary is not particularly interested in the crypto world.

Tracey Dunn:
Yeah.

Robyn Jacobson:
Which case it potentially does need to be crystallized and converted back into fiat currency again.

Tracey Dunn:
Yeah.

Robyn Jacobson:
Look, Tracey. I don't think we've even scraped the surface of all these issues, but it's been fascinating to take a walk with you through this amazing new world. Thank you so much for your time.

Tracey Dunn:
Thank you so much again, Robyn.

Robyn Jacobson:
Thanks for listening to this episode of TaxVibe. I've been chatting with Tracey Dunn of RSM Australia in Perth. To keep up to date with TaxVibe, be sure to subscribe, rate, and review wherever you listen to your podcasts. If you'd like to connect with us on social media, follow The Tax Institute on LinkedIn, Facebook, Instagram and Twitter. You can join the conversation on our member only community forum at community.taxinstitute.com.au. Not a member of The Tax Institute? Join a collective voice of 15,000 practitioners at the heart of the profession and find out what the best of tax professionals have in common. For more information, visit taxinstitute.com.au/membership. You can also contact us by emailing taxvibe@taxinstitute.com.au. We look forward to you joining us next time.