A young crypto-loving lawyer from Brisbane is challenging the Australian Taxation Office (ATO) in a bid to prove that Bitcoin isn’t property. If successful, anyone who has paid tax on their crypto gains could be in for a “massive” payday.
Damian Lloyd, a former ATO employee and lawyer who works in the crypto space at Cadena Legal, says the ATO could have been unjustly taxing crypto assets since 2014. His argument hinges on whether cryptocurrencies like Bitcoin can be considered property under Australian tax laws.
While this seems rather wild, the point isn’t refunds, but that the ATO needs to address these fundamental legal issues when it comes to cryptocurrencies.
If cryptocurrencies don’t qualify as property, we have a problem, says Lloyd.
Crypto and taxes
Cryptocurrency and taxes are two topics that often baffle the average person. But not Lloyd. He has applied for a private ruling challenging the definition of cryptocurrencies and how they are being taxed.
Lloyd’s journey into the world of crypto taxation began during his tenure at the ATO, where he says he handled private rulings, worked on complex compliance cases and contributed to law reform measures. In 2018, he became interested in crypto assets during the rise of Initial Coin Offerings (ICOs) and has been working in this space since.
While doing a Master of Laws at the University of Queensland, Lloyd wrote a dissertation on the proprietary nature of crypto. He came to believe that the way crypto was being taxed might be incorrect.
Lloyd told The Chainsaw that he received support from his supervisor (a barrister) and reviewers: “One was a professor in property law, and the other was a technology lawyer. Both supported the decision.”
CGT rules and crypto
When it comes to taxation, assets are governed by capital gains tax (CGT) rules. If you make a profit on an asset, the profit is included in your assessable income and subject to tax.
But if you make a loss, the loss can only reduce the profits made on other assets. It cannot be used to reduce tax on other income such as salary or wages. For crypto assets, this means that any profit made on their sale can be subject to taxation. However, in order to be an asset recognised by the CGT rules, it needs to be property or some form of right.
“Essentially, my argument is that Bitcoin is not property, nor a right,” Lloyd says. “My research made me question whether the ATO has been unjustly taxing crypto assets since its original Taxation Determination in 2014 was published. Even though I shared my dissertation and other reasoning with the ATO, I never received any response.”
Crypto tax: Bitcoin May Not Be Property
Lloyd pointed out that the tests for defining what is property and what isn’t are complex. He cited the Ainsworth Test, an Australian legal precedent that requires that a right or interest in a thing only amounts to property if it has certain, additional legal characteristics. But, he says, “that test presumes that there are rights in the thing. If there are no rights in the thing, the test arguably doesn’t apply”.
Llloyd adds: “My central argument is that the ATO says that there are rights in holding Bitcoin. But they’re not enforceable. In my research into rights and how these provisions are framed in our tax laws, rights have to be enforceable.
“If they’re not enforceable, then the Commissioner must mean that there are no rights in crypto. And if there’s no rights in crypto, then the Ainsworth Test doesn’t apply and crypto is not property. The end result is that crypto might not be taxable.”
Lloyd has applied for a private ruling to challenge the ATO’s classification of Bitcoin as a CGT asset. If the ATO disagrees with his position, Lloyd may need to take the issue to court for a definitive resolution.
He believes that if the ATO is proven wrong, it could lead to two possible outcomes. Either the government would need to intervene and create enforceable rights for crypto holdings to make them CGT assets. Or, the government would need to provide tax refunds for anyone who has ever paid taxes on crypto.
“That’s why I’ve put in the ruling,” Lloyd says. “The ATO has to take a stance on the arguments that I’ve raised. And, ideally, we need confirmation from the courts.”
What the ATO say
An ATO spokesperson told The Chainsaw that the ATO cannot comment on the private ruling. But, they said that to determine if Bitcoin is a ‘CGT asset’, there is a number of tests or factors that can be used in determining whether something is property. “On the basis of the ATO view that crypto is a CGT asset, transactions involving crypto assets are subject to the same tax rules as assets generally. There are no special tax rules for crypto assets. The tax treatment will depend on how you acquire, hold, and dispose of the asset.”
Lloyd is advocating for clear crypto policies that benefit both taxpayers and the government. He recognises that the crypto space is still emerging and needs to build political capital like other industries in order to influence policy effectively.
“I’m taking the step on behalf of people who can’t, who don’t have the knowledge in terms of the technology and the law itself,” Lloyd says. “I want to challenge the ATO with respect to the issue because it could very well be that they are wrong. It’s not an easy argument to get your head around, but I still feel it’s very defensible.”
If Lloyd wins, and the ATO can’t work out how to make Bitcoin a CGT asset, he says “There could be a massive refund for anyone that’s paid tax on crypto”.