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Editor’s note: Senior Tax Counsel Bob Deutsch’s comments on bitcoin can be found in TaxVine 47 (8 December 2017)

MEMBER 272 writes: 

A good informative and thought-provoking article – thanks Bob. 

MEMBER 273 writes: 

Here is a link for anyone actually interested in learning about the cryptocurrency space and the underlying technology: https://lopp.net/bitcoin.html 

If you are an accountant I would also encourage you to learn how to use a "block explorer", a tool that allows you to audit the public ledger of any blockchain. 

MEMBER 274 writes: 

For bitcoin, if the purchaser has purchased $10,000 worth in situation 3, does this apply per type of coin or for total purchases of all cryptocurrencies in your name? 

MEMBER 275 writes: 

The following is a brief and quick summary of what I understand to be the complexities and the guidelines the profession and taxpayers will need from the Government and the ATO regarding bitcoin and cryptocurrencies. 

I am certain I am covering matters you are aware of and apologies for making the most obvious statements. 

I am not a cryptocurrency expert and only now have I tested the crypto waters and thought I would share my experience. 

General comments 

  • Cryptocurrencies (CC) are not shares as we understand them.
  • CC do not have a physical paper script or any record other than a cryptic serial.
  • Once a CC is moved out of the Crypto Exchange (CE) to the private wallet (PW), there is no record until it goes back to the CE.
  • CC can be stored on your PW indefinitely, without a trace.
  • If traded for goods, there is no trace unless the goods need to be registered (e.g. a motor vehicle).
  • You can empty and close your CE account from all funds and transactions, as CC can remain in a PW, forever.

ATO to define “trader”

The ATO currently uses volume, time spent and records to define a “trader”. When dealing with CC this becomes a lot more complex. 

At the time of writing this, bitcoin hit $28k. To trade, you will need to open several wallets on several CE, overseas and Australian. The traders can use coin jar, a bucket. There is no trace until the funds are converted into cash. 

An ATO ruling is required to define “trader”. The ATO will need to be proactive and consider: 

1. How many CE wallets does a taxpayer hold?

2. How many CE exchanges is the taxpayer registered with?

3. The number of PW held?

4. One PW may hold investments for several arms -length taxpayers.

5. One PW can be a legacy. 

The ATO may consider a simple YES/NO box to get a taxpayer to disclose whether they hold any CC. The ATO can then use this data. The ATO may consider to build its own Blockchain system. 

If the taxpayer holds the “same” CC for more than 12 months, then capital gains with a 50% discount needs to be applied, with this discount also applying to family trusts. 

Movement from the CE to your PW should not be treated as a sale as different coins have different wallets. 

Coinbase (a CE), was contested by the IRS: https://blog.coinbase.com/coinbase-obtains-partial-victory-over-irs-dac041db59a3

In summary 

  • As a trader, using the FIFO system will be difficult.
  • Traders and investors are very sophisticated.
  • There are many offline wallets.
  • Maintain the current CGT threshold for CC investing.
  • The ATO needs to define a CC trader.
  • There needs to be ATO guidance to explain sufficient record keeping for a trader.
  • There will have to be grandfathering rules for investors.
  • Tax returns to have a YES/NO box to identify whether wallets that are holding BC are held in-trust or partnership for others.

ATO guidance: https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/?page=1#Using_bitcoin_for_personal_transactions

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