In June, the Australian government announced it would introduce legislation to exclude crypto assets from being treated as a foreign currency for income tax purposes. If crypto regulation leaves you with more questions than answers, fair enough. Legislation is a minefield and its interpretation is best reserved for professionals. To rid you of confusion, The Chainsaw reached out to legal specialists at Piper Alderman to get their expert take on what this proposed legislative amendment is all about so you don’t have to.
When the Australia federal government initially announced plans to introduce legislation amending treasury laws, it referenced El Salvador’s decision to adopt Bitcoin as legal tender as potentially creating legal uncertainty. Specifically, it noted that, “The Government will therefore move to clarify current arrangements in legislation that will mean crypto assets will not be regarded as a foreign currency for tax purposes.”
Australia seeks regulatory clarity
In getting to the bottom as to how this new piece of legislation arose, Will Fennell, taxation specialist and partner at Piper Alderman noted that:
In 2014 the ATO issued binding public guidance that Bitcoin is not foreign currency for income tax purposes, because it is not a monetary unit recognised and adopted by the laws of any other sovereign State. However that position became untenable during 2021 when El Salvador adopted Bitcoin as a national currency.
Will Fennell, taxation partner, Piper Alderman
In outlining the background to the current circumstances and its untenable position, he added that subsequent to the ATO’s 2014 ruling, “taxpayers have reported cryptocurrency gains and losses on either revenue or capital account, and without any adjustment under the foreign currency provisions”.
Noting that foreign currencies are those “other than Australian currency, and subject to a specific set of rules under the income tax laws”, the underlying rationale of the legislation becomes more readily apparent.
Prior to El Salvador’s historic move, there was little room for ambiguity in terms of crypto’s tax treatment — it was treated just like any other asset where you pay capital gains tax upon the sale of the asset in question. However, as El Salvador made Bitcoin legal tender, it opened up the door for potential challenges arguing that other tax rules ought to apply since crypto had already been declared a currency elsewhere.
When asked by The Chainsaw to clarify the potential underlying motive of the planned amendment to existing laws, Fennell responded that:
The amendment aligns the income tax laws with the position taken by the ATO since 2014 regarding Bitcoin and the foreign currency provisions, which could no longer be sustained given the adoption of Bitcoin as a currency in El Salvador in 2021. Without the legislative amendment, the 2014 position adopted by the ATO would have been open to challenge by taxpayers in the AAT or Federal Court.
Will Fennell, taxation partner, Piper Alderman
Upcoming crypto regulation offers welcome clarity
Among industry specialists and casual observers, it’s evident that the newly-elected Australian government is firmly focused on bringing regulatory clarity to the crypto sector. Upon assuming office earlier in May, the Albanese government wasted no time in highlighting its priorities which included crypto regulation, alongside climate change and cost-of-living pressures.
Coupled with ASIC’s recently published guidelines that included crypto as a specific area of focus, the proposed legislation seemingly represents another example of the government looking to tie up any loose ends on the legislative front. Interested parties have until September 30 to make their voices heard on this latest amendment.
Commenting on the broader regulatory shifts underway, Will Fennel commended the work complete and underway thus far, saying that, “Having the foreign currency issue clarified is definitely a positive step in the right direction.” However, he noted that there was “still a great deal more legislative reform needed, particularly in relation to the tax treatment of DeFi transactions”.
In liaising with The Chainsaw, digital law specialist and partner at Piper Alderman Michael Bacina said that he saw the current consultation as “another positive step” towards assisting regulators to become “better educated around digital assets”, ensuring that industry and those who service it are heard”.
Legal reforms
Following last year’s bi-partisan Senate Inquiry and Report, he added that proposed legal reforms were a continuation of the recommendations made, adding that he hoped they would lead to “considered and technology neutral regulation giving greater certainty, protecting consumers and helping attract Australian innovation and jobs back to Australia”.
Bacina noted that despite the sector’s call for “sensible” crypto regulation over the years, delays thus far have resulted in “Australian projects and jobs leaving for jurisdictions with clearer and better fit regulation”. In the absence of necessary and timely regulatory reform providing greater clarity, this trend, he feared, would unfortunately continue.
With that said, local firms remain bullish on the sector, regulatory uncertainty aside. Zooming out, it’s evident that while things could be better, they most certainly could be much worse. While regulatory uncertainty is never good for business, many jurisdictions tend to be more hostile towards the industry. To that extent, it comes down to a matter of degree and directionality.
While there are certainly areas that could be improved to enable Australians to compete on the big stage, it seems reasonable to conclude that directionally, the nation’s lawmakers and regulators are on the right track.
