Cryptocurrency Demystified – Part 1

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Cryptocurrency is a form of digital asset, typically embodied in ‘coins’ such as Bitcoin or Ethereum. Investors are able to purchase and hold cryptocurrency as they would any other currency and in recent years there has been a distinct rise in the number of people choosing to invest in cryptocurrency as a financial asset. Even more recently cryptocurrency has become recognised as a legitimate financial asset, with Tesla now allowing customers to purchase a car for bitcoin, bitcoin and other cryptocurrency ATM’s springing up around the world and even some law firms accepting payment in cryptocurrency. It’s becoming increasingly clear that cryptocurrency isn’t going anywhere which makes it necessary to understand how exactly cryptocurrency is going to operate from a legal point of view.

Cryptocurrency and Tax

The Australian Taxation Office (ATO) treats cryptocurrency as a financial asset, meaning that investing in cryptocurrency can give rise to a Capital Gains Tax event when an individual

  • Sells or gifts cryptocurrency
  • Trades or exchanges cryptocurrency (even when exchanging one cryptocurrency for another)
  • Converts cryptocurrency to fiat currency (for example AUD or USD)
  • Uses cryptocurrency to obtain goods or services

Because cryptocurrency is treated as an asset, when it is used to buy another cryptocurrency or a good or service the ATO treats the transaction as disposing of one CGT asset for another CGT asset and capital gains is paid on the value of the new asset, measured in AUD. Thus, it’s important for investors to be aware that when they trade cryptocurrency they may be incurring capital gains tax.

When a business uses cryptocurrency, for example taking payment in cryptocurrency, the cryptocurrency is treated as a business asset with value equivalent to the cryptocurrencies worth in Australian Dollars and can thus influence the tax obligations the company has at the end of the financial year.

Since 2020 the ATO has focused on ensuring cryptocurrency investors meet their tax obligations, sending out reminder letters to investors that they have a tax obligation when trading in cryptocurrency. If you’re looking at investing in cryptocurrency, or are a business trading with crypto, it may be worth seeking advice on the consequences of your cryptocurrency transactions, your tax obligations and how to keep proper records of your transactions.

Cryptocurrency and Loans

One of the more interesting considerations to arise as cryptocurrency becomes accepted in more and more circumstances is whether it can be used as security or collateral for loans. Some companies are willing to provide cash loans using cryptocurrency as security, there are also options to take a loan of one cryptocurrency while offering another cryptocurrency as security, however crypto still has limited use for the average consumer looking to take out a personal or business loan in Australia.

As it currently stands, Cryptocurrency isn’t recognized under any categories of collateral contained within the Personal Property Securities Act 2009. This means that if cryptocurrency were to be used as collateral for a loan, the parties to the loan wouldn’t have access to the protections and enforcement mechanisms enshrined within the act.

Part of what has attracted many investors to bitcoin is its secure and untraceable nature, in order to access their digital ‘wallet’ an individual needs a passcode or PIN, without this code there is no way to access the currency. Thus if cryptocurrency was offered as security and a party sought to claim it, if they do not possess the passcode or PIN and do not have any means of enforcing their right to the security under the act, the party to the loan may be left without remedy.

Nevertheless cryptocurrency is proving to be a valuable and increasingly recognised asset, if parties were seeking to put together a loan agreement and wanted to use cryptocurrency as the security our lawyers can help provide solutions that ensure parties are able to use their assets as security for a loan and that parties accepting cryptocurrency as a security are able to operate confidently.

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