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Re: Taxable Event Between Crypto Trades

This post is archived and may not be up-to-date.

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Initiate

Views 5853

Replies 41

I would just like to point out how unfair the following scenario is: If I buy coin "A" with Bitcoin then sell coin "A" back to Bitcoin say 6 weeks later for 12x the amount of Bitcoin I used for the initial investment, I am lead to believe that this is a taxable event by calculating the AUD profit equivalant. But in order to pay this tax bill I would be forced to sell part of this Bitcoin profit back to AUD which in turn is yet another taxable event, which in turn I would need to sell more Bitcoin in order to cover this second taxable event which is yet another taxable event which I would have to yet again liquidate more BTC in a never ending chain reaction until there is nothing left. 

 

Why can't I just cash out the BTC when I want to and then pay 45% tax and be done with it? 

41 REPLIES 41
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Devotee Registered Tax Practitioner

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Firstly you're arguing against a scenario that applies for all investors in realtity 

 

Sell make Capital Gain you can either reinvest all your profits or take out provisions for tax its called risk evaluation.

 

Instantly transferring back to AUD due to the fee structure actually triggers a small capital loss reducing the intial gain, so the scenario you've played out is completely incorrect 

Smart investors always have a split take x% of profit reinvest the remaining that way they eliminate the chance of being caught out if the market retracts 

Crypto Investors seem to think they should be entitled to all these extra concessions simply because they failed to do the initial research and plan ahead

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Devotee

Replies 20

If the Law was that all transactions had to involve a flow of cash that was equal to the value of the amount upon which tax could be charged no one would pay any tax as everyone would structure transactions to avoid the exchange of cash.
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Megastar

Replies 0


@Jack1wrote:
If the Law was that all transactions had to involve a flow of cash that was equal to the value of the amount upon which tax could be charged no one would pay any tax as everyone would structure transactions to avoid the exchange of cash.

I can't see how structuring transactions around crypto-to-crypto trades is going to confer a means to avoid tax. Could you elaborate? If you Shapeshift $1000 of crypto A for crypto B you still have $1000 of crypto, and note that this doesn't even require having an account on an exchange. What exactly has been gained in such a trade and why should that be a CGT event? It's a different matter if you dispose of the crypto for a more tangible asset like property or shares, or convert to cash.

 

With the exchange of almost any other kind of asset there is at least a notional, if not an actual, conversion to fiat currency. With cryptocurrency, however, there is generally only a notional reference to another cryptocurrency (Bitcoin for example) to give an "exchange rate" for the conversion. That is, I think, a fairly unique situation.

 

I believe there is a very good case for exempting crypto-to-crypto exchanges from CGT:

  • Firstly, CGT on crypto-to-crypto trades would be a compliance and auditing nightmare. Determining the fiat value at the time of conversion can be difficult given the extreme volatility of cryptocurrency. Gains of thousands of percent and near total losses over a short period are common (just in the last couple of months ZClassic gained 10,000% in a fortnight due to the Bitcoin Private fork, and BitConnect Coin dropped 95% in a single day after the suspected BitConnect ponzi collapsed). Add to that the fact exchanges are popping up and shutting down (something like 30% of exchanges have been hacked in the last year) all the time so a trader may not even be able to access records of trades made in the past year. If compliance is made too difficult then crypto traders will probably conceal their holdings rather than deal with it. This seems to be the situation in the US where apparently only a very small percentage of crypto holders are reporting to the IRS.
  • Secondly, it puts people who are trading crypto at great peril, many of whom are not sophisticated investors and probably don't even realise they are "investing/trading". For example, say someone puts a spare $500 into a promising new cryptocurrency they've heard of as a punt. It's a small amount that they are prepared to lose. After a few months the crypto has increased a hundred-fold in value. They hear of another cryptocurrency that's all the rage and decide to Shapeshift what they have into that (they may not even be aware of the increase in fiat value of the original crypto as it is never referenced when shapeshifting). If that is a CGT event then they have made a capital gain of around $50,000 and probably without realising it a corresponding tax liability. And here's the real kicker; if after the end of the financial year the new cryptocurrency price collapses, or it gets hacked or is otherwise lost, they have nothing to sell to pay it. So, not only have they nothing to show for their $500 investment, which they were willing to lose, they now have a $20,000 tax bill! And then, to add insult to injury, as I understand it the capital loss of the crypto cannot even be claimed against their income in the following year to reduce their income tax, only against a capital gain, which they may never make! Is that fair? While that kind of situation could potentially happen with other asset classes it is orders of magnitude more likely with crypto due to the extreme volatility and the counter-intuitivity of making trades without reference to fiat.

 

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Devotee

Replies 18

@Seti it’s an interesting proposition.

Dont forget your original example was not swap Crypto A for Crypto B, it was swap Crypto A for Crypto B and some time later back to Crypto A at a profit.

But you’ve boroadened the debate somewhat so let’s deal with that.

A bloke with a shop down the street full of stock is no different to a bloke with a text file putting a couple of lines with your name on it abt spitting it out around the Internet.

Absolutely no difference.

If what you are saying is that the text file bloke is making it impossible for you to abide by Australian Law then his endeavours should be banned.

It’s that simple.

No one is entitled to make a nuisance of themselves.

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Initiate

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The tax should only be on realised gains back to fiat. It's all just worthless theoretical paper profit that can go to zero unless you cash out. 

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Megastar

Replies 16

 

@Jack1 wrote
@@Seti it’s an interesting proposition

Dont forget your original example was not swap Crypto A for Crypto B, it was swap Crypto A for Crypto B and some time later back to Crypto A at a profit.

@Jack1I think you're confusing me with the Original Poster. I only chimed in to comment on whether crypto-to-crypto should be considered a CGT event.

 


A bloke with a shop down the street full of stock is no different to a bloke with a text file putting a couple of lines with your name on it abt spitting it out around the Internet.

Absolutely no difference.

I  disagree. Firstly, your analogy of cryptocurrency as a "bloke with a text file" is completely wrong. Cryptocurrencies like Bitcoin are decentralised. There is no "bloke" or central authority holding the ledger. It might exist on thousands or even millions of nodes on the internet. Also, there are no lines with "your name" on it. There are only addresses, and having the private key for that address allows you to sign and make transactions on that address. If you don't reveal your connection to that address there is no way for anyone to know that you are its owner.

 

Secondly, of course there are differences:

  • One is a tangible asset that exists in a physical location, and the other is an abstract value signal that only exists on the cryptocurrency network. It can only be manipulated by someone holding the private key and can be done from any location.
  • The value of store stock will always be with reference to fiat. This is not necessarily the case with cryptocurrency which may have been purchased with another cryptocurrency with no reference to fiat.
  • It is unlikely that any kind of physical stock could change value at anything like the magnitude of cryptocurrency which might double or halve in value in the time it takes to write this sentence. When was the last time store stock increased 10,000% in a year like a number of the main cryptocurrencies did in 2017?
  • Cryptocurrency can be exchanged for another without any action by a human third party. Could a store owner push a few buttons on their computer and cause their stock of Spearmint Tic-Tacs to transmogrify into Orange-Flavour Tic-Tacs without even entering the stock room, and if they could would that be, and should that be, a CGT event?

If what you are saying is that the text file bloke is making it impossible for you to abide by Australian Law then his endeavours should be banned.

As I said before there is no "bloke". There is no central authority. And if you think cryptocurrency can be banned then you clearly don't understand it. It is unstoppable and there is nothing you, or anyone else, or the government can do to about that.

 

Also, currently it is not clear what the Australian Tax Law is with regard to crypto-to-crypto transactions. While many people are assuming that it is a CGT event the ATO's guide to cryptocurrency does not make this clear at all. Whether it is a CGT event is one of the most frequently asked questions on this forum and the ATO has yet to give a definitive answer so it seems that it is still up for consideration. As I have said I think there is a very good case for it not to be.

 

I should say that if the law is such that it is impractical or impossible to comply then it is the law that needs to change to deal with the reality of innovations like crypto, instead of trying to change reality to comply with the law...

 

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Devotee

Replies 15

@seti

Barter exchanges are not new. They are older that exchanges for fiat. They are taxabale.

Stock is automatically reordered or exchanged for trade debt upon minimum stock levels without human intervention routinely.

Tax obligations are in $AUD. The requirement for stating value in $AUD is common to all gains.

“Fred Jones” or “h3g1x2aab4” are both names that identify. Just because one is called an “address” makes no difference. You still need to do more to track both to a particular person you can tap on the shoulder.

As for anonymity let you tell you a story my grandfather used to tell me.

His mate was the local detective seargent. Crime squad. And there used to be this pub in town that was the spot to go for your hot goods, drugs, and all the rest. Sit in the back bar long enough you’d get offered something.

Everyone new about it.

Why didn’t the detective seargent shut it down?

Because he and his mates just had one place to keep an eye on and they knew everything that was going on in town.



Megastar

Replies 14

 


@Jack1wrote:

Barter exchanges are not new. They are older that exchanges for fiat. They are taxabale.

@Jack1

I understand that. I'm not questioning whether barter transactions should be taxed. If crypto is exchanged for other asset types, or goods and services, or converted to fiat currency then that should be a taxable CGT event.

 

The question, however, is whether a crypto to crypto exchange/trade should be a CGT event. I can't see any good reason why it should be (but I can think of several good reasons why it shouldn't) and so far you haven't given any good reason either.

 

Why should a crypto to crypto exchange be a CGT event? Exactly what is the gain?

 


Stock is automatically reordered or exchanged for trade debt upon minimum stock levels without human intervention routinely.

And how does the stock room get replenished? This is the difference. With crypto the whole exchange can be without human intervention and third-party knowledge.

 


Tax obligations are in $AUD. T the requirement for stating value in $AUD is common to all gains.

Which for a crypto to crypto exchange can be very difficult to determine with any accuracy. Say you trade 2 cryptocurrencies. The exchange tells you the value of the exchange was 0.1 BTC, but that exchange doesn't give a value in AUD or even trade in it. So, what value do you use? The exchange rate can vary considerably across exchanges and time of day. You might be able to look up historical average, or end of day value, but what was the value at 3:15pm January 7 when the trade actually occured? This is particularly problematic if the value of BTC crashes or booms on the day of the trade, which it does often.

 

That's why crypto exchanges would be an auditing nightmare if they are a CGT event.

 


“Fred Jones” or “h3g1x2aab4” are both names that identify. Just because one is called an “address” makes no difference. You still need to do more to track both to a particular person you can tap on the shoulder.

The difference is that "Fred Jones" is a name that can be directly connected to a person, while the address is only connected to a cryptographic key pair. Because the keys are generated privately, and the private key is never recorded externally, there is no way to connect that to a person who owns the key unless they choose to reveal their connection to it.

 

Cryptocurrencies like Bitcoin offer transparency by recording publicly transactions between addresses, but because the addresses are not connected directly to persons names they offer a degree of anonymity. Some other cryptocurrencies, like ZCash for example, go even further and conceal the transactions themselves, so that only the parties involved can know that a transaction occured.

 

Good luck to the authorities who want to try and track that...

 


As for anonymity let you tell you a story my grandfather used to tell me.

His mate was the local detective seargent. Crime squad. And there used to be this pub in town that was the spot to go for your hot goods, drugs, and all the rest. Sit in the back bar long enough you’d get offered something.

Everyone new about it.

Why didn’t the detective seargent shut it down?

Because he and his mates just had one place to keep an eye on and they knew everything that was going on in town.

I'm not sure what the point of that story is. Authorities simply won't be able to track cryptocurrencies, particularly if people move to privacy coins like ZCash and Monero. So, they better not tighten their grip too much or it will all slip through their fingers...

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Devotee

Replies 13

@Seti

My original response was entirely why Crypto to crypto exchange shouid be, and is taxable.

People have come up with all sorts of schemes to avoid tax as far back as the bricking over of glass panels to avoid window tax in medieval times.

This is no different.

Secondly, the capacity to hide transactions if your view is accurate makes it dangerous to law enforcement to the point of requiring banning fullstop let alone a view on how it should be treated for tax!

To defeat those two points alone you had better have a very good 10 reasons why crypto barter gains should not come with an obligation to account for in your tax return.

A very good 10 reasons.

Fire away let us have them!