If you’ve made a loss on crypto, you might be wondering where that leaves you in regards to your tax position. Since Bitcoin was found by the AAT to not be a foreign currency, as we discussed in the first article of this series here, it is generally treated similarly to shares in this sense. 

For active traders: non-commercial loss rules may apply

If you are an active trader, you may be able to offset this loss against your other income. You generally can’t claim a loss for a business that is a hobby and unlikely to ever make a profit. The non-commercial loss rules determine whether you can in this case or have to defer the loss until you make a profit. 

To be able to offset this loss, you must satisfy two requirements. The first is the income requirement, which is met where the sum of the four elements for calculating your income is less than $250, 000. The elements are:

• Taxable income, which is the assessable income minus your allowable deductions for a year.
• Reportable fringe benefits, which is shown on a payment summary if it passes the threshold and takes part in this calculator.
• Reportable super contributions which include your reportable employer super contributions and your personal deductive contributions.
• Total net investment losses from 
  • Rental property investments such as negatively geared rental properties
  • Financial investments such as negatively geared share portfolios 

The second requirement is to pass at least one of the following four tests:

• Your assessable income, made up from your ordinary income (such as gross earnings excluding GST) and statutory income (such as capital gains) from your business activities must be at least $20, 000 for the year. 
• Your business has made a tax profit in three out of the five past years, which excludes any loss from that business that you had earlier deferred
• You are using real property, which includes land, structures and interest in both, of at least $500, 000 in your business activity on a continuing basis. 
• You use $100, 000 worth of ‘other assets’ in your business activity. This includes equipment, trading stock, items leased from another entity, and trademarks, patents and copyrights. This does not include real property or vehicles. 

If these two requirements are satisfied, then you may be able to offset your crypto losses against your income from other work. Otherwise, the loss would get parked to the side and you would only be able to claim it against your taxes if you later make profit off crypto.

For passive investors: capital loss rules may apply

If you have made a loss as a passive investor, capital loss rules will probably apply. This would mean you could deduct the loss you’ve made on crypto from your capital gains to reduce your capital gains tax. These must be used at first opportunity which means that if you’ve made a loss in the current year, you must use the loss to reduce any capital gains in the current year.

If your capital loss is greater than your capital gain, you could carry it forward and deduct it from capital gains in later years. There is no time limit for this. It is also important to note that a trading loss can be applied against capital gains but a capital loss can’t be applied against trading gains.

Conclusion:

Depending on whether you satisfy the non-commercial loss rules, your main two options are either to use the loss to offset your income or to use it to decrease your capital gains tax, with the option to park it if outweighs your capital gains.

If you have any questions or would like further assistance, please contact us.

The Administrative Appeals Tribunal’s recent decision to a court case we ran against the ATO has significant consequences on the tax status of Bitcoin. In the first article of this four part series, we explain the crux of the case, summarise our submissions and lay out the judge’s conclusion.

The heart of the issue 

Do you have to pay tax on bitcoin? The answer lies in whether Bitcoin is considered a foreign currency for the purposes of the Income Tax Assessment Act 1997. If it is a foreign currency, then tax requirements under div 775 are applicable. Section 995-1.1 defines a foreign currency as ‘a currency other than Australian currency.’ The interpretation of this section will solve the question.

Part 1 of Submissions: How Currency should be interpreted

We submitted that the word ‘currency’ should be interpreted widely, aligned with previous cases. For example, in Watson v Lee, the High Court noted that the word ‘currency’ in a constitutional context need not be confined to money of a particular nation. Further, things like rum and bank issued notes were considered currencies and within the Commonwealth’s regulating powers. The High Court of Australia again had a similar approach in the case of Goldsbrough Mort & Co Ltd v Hall, where it noted that currency need not be issued by governmental entities. 

We also referred to the Explanatory Memorandum of the Bill to shed light on the purpose behind the foreign currency definition. In paragraph 2.7, it is clear that the intention was to create a framework where foreign currency gains and losses arising out of business transactions do not fall outside the income tax net. Reference was made to the ERA case, where a taxpayer did not have to pay tax on their foreign currency gains because they dealt only with US dollars and did not convert the proceeds into Australian dollars. The parliament, at paragraph 2.21, noted that the new law was intended to bring to account all foreign currency gains and losses for tax purposes, regardless of whether it has been converted into an equivalent amount of A$.

Part 2 of Submissions: Bitcoin fits the definition of foreign currency

Having regard to the purpose of bitcoin, we argued that it fit the definition of foreign currency. The Satoshi Paper, the blueprint used to code and develop bitcoin, written by its founder Satoshi Nakamoto, describes the purpose of bitcoin as to allow payments to be sent directly from one party to another without engaging a financial institution. 

WE assessed that Bitcoin was programmed solely for this function, it has no other use. We gave mathematical support for this premise by reference to the developer guide, which explains how it uses cryptography to create security for transactions between two willing parties. ‘

We also supported our argument by pointing out its current usage, in both general transactions and complicated arrangements. It is possible to lend and earn interest on bitcoin, as well as invest in derivatives and securities using it. We gave examples of foreign governments such as Sweden and Switzerland which have accepted it as legal tender. 

Therefore, within the legal definition of currency and with regard to the intention of Parliament in enacting the definition, we argued that Bitcoin fits the definition of currency. And if it is accepted to be currency, it would automatically qualify as ‘foreign currency’ as per the Income Tax Assessment Act 1997, since it is a currency ‘other than Australian currency’.

The Tribunal’s Decision:

Ultimately, the Tribunal held that the phrase ‘foreign currency’ should be read down to not include decentralised ‘unofficial’ currencies such as Bitcoin. 

While admitting that the s 995-1 definition is awkward, the Tribunal noted that ‘an Australian currency’ should be interpreted as a reference to the unit of exchange established in the Currency Act, and therefore ‘another currency’ must be a similar office currency issued by a sovereign state. 

Although Bitcoin may satisfy the usual definition of currency since it is a fungible, measurable and used as a medium of exchange for goods and services, it was held not to satisfy the narrow definition under the Income Tax Assessment Act.

The Tribunal made a final note that the question of whether cryptocurrencies should be dealt with as a foreign currency for the purposes of income tax is a question for the Parliament. 

This finding would presumably extend to all other cryptocurrencies that are not issued by a government.

Conclusion

In conclusion, since Bitcoin currently does not fall within the definition of foreign currency for the purposes of the Income Tax Assessment Act, the tax requirements set under div 775 are not applicable. 

In the following three articles and videos of this series, we explain the implications of this. 

To read the Tribunal’s findings: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2020/1840.html

PDFs to our submissions and the ATO’s submissions are also below. 

If you have any questions, please feel free to contact us here or call us on our number: 02 7200 8200, mentioning that you read this article.