Crypto assets not foreign currency for tax purposes from 1 July 2021

In a joint media release published on 22 June 2022, the Government announced that they will legislate retrospectively to exclude crypto assets from being recognised as foreign currency from 1 July 2021 for Australian tax purposes.

This legislation is intended to provide further certainty for taxpayers in relation to the taxation of crypto assets following the Government of El Salvador formally recognising Bitcoin as legal tender in September 2021.

Despite the position now being clear in Australia, it is important to note that the legal classification of crypto assets is by no means universally settled and therefore could make the tax treatment of cross-border crypto transactions, the subject of conflicting laws. For example, Italy treats crypto assets as similar to currency for taxation purposes and we may see further developments globally once central banks begin issuing their own digital currencies (known as CBDCs) for retail use.

It is safe to say that the legal classification of Bitcoin and other crypto assets remains a hotly debated issue globally and may become a point of focus in the Board of Taxation’s review into the taxation of digital assets and transactions which is due to report back to the Government by the end of this year.

Outlined below is the current state of play around the globe:[1]

References

[1] OECD (2020), Taxing Virtual Currencies: An Overview Of Tax Treatments And Emerging Tax Policy Issues, OECD, Paris. www.oecd.org/tax/tax-policy/taxing-virtual-currencies-an-overview-of-tax-treatments-and-emergingtax-policy issues.htm

[2] On 7 September 2021, El Salvador became the first country in the world to formally accept Bitcoin as legal tender following the Legislative Assembly’s approval of Decree No. 57, Bitcoin Law.

[3] The Central African Republic became the second country in the world to adopt Bitcoin as an official currency on 22 April 2022.

[4] The Italian Taxation Authority, Agenzia delle Entrate, has made clear in private rulings that crypto assets are to be treated in the same way as foreign currency for taxation purposes in Italy, taking the decision of the European Court of Justice in C-264/14 Skatteverket v David Hedqvist (which held that virtual currencies were comparable to traditional currencies for tax purposes) as applying for the purposes of VAT and income taxation (Deliberation no. 72/E of 2016, Agenzia delle Entrate).