In major crypto news, a judge’s ruling in a criminal case could lead the way for as much as $640 million in potential tax refunds. This is also important because it directly challenges the long-held stance about cryptocurrency taxation from the Australian Tax Office.
There are major implications from this ruling, particularly in the crypto space. This court decision is a major development when it comes to capital gains tax (CGT) as it relates to Bitcoin transactions and their role as a taxable asset.
The Ruling
A criminal case, one that involved federal police officer William Wheatley, could be the catalyst for change. In this case, Wheatley allegedly stole 81.6 BTC in a 2019 drug investigation he was involved in. At the time of his alleged crime, these assets were worth $492,000 AUS ($317,266 USD). At current market prices, however, that valuation is now more than $13 million AUS ($8.3 million USD).
Despite the massive shift in value, that is not the aspect of the case that makes this ruling significant. Judge Michael O’Connell of Victoria, as part of his ruling, said that Bitcoin as a property is similar to the Australian dollar more than it is as a speculative asset like gold, shares, or currency.
This is important because the Australian Taxation Office (ATO) classifies it as a speculative asset when it comes to taxation processes. With this new interpretation, Bitcoin and other digital assets are considered more of a local currency instead. This could be a major shift in precedent in Australia, which would then place these assets outside of the CGT regulations currently in place when it comes to “disposing of” or using an asset that has increased in value.
As a result, it is estimated that more than $1 billion AUS could be due in tax returns. This could also result in new returns from cryptocurrency holders. Given that there are now roughly 31% of Australians that own or have owned digital assets, that could result in major challenges for the ATO.
Tax Refunds Could Hit $640M Mark
Tax lawyer Adrian Cartland commented on the verdict, saying that he thinks it “totally upends” the current position of the ATO. He maintains that the ruling essentially holds Bitcoin in the same regard as Australian money. “That is, it is not a CGT asset. Therefore, acquisitions and disposals of Bitcoin have no tax consequences,” he said.
There will be an appeal process, but if the ruling is upheld, Cartland speculates that there could be more than $1 billion AUS ($640 million USD) in potential tax refunds. Though he thinks there could be a ton of tax refunds, the ATO isn’t ready to suggest that there is an official figure in mind should this case change the taxation rules of Bitcoin in Australia.
Challenging Current Tax Laws
Going back to 2014, the ATO has listed classified crypto assets as capital gains tax assets. Basically, this means that holders of crypto are required to pay tax on them when they trade or sell them. Under guidance from the ATO, disposal of Bitcoin of any kind – including exchanging it for other crypto, selling it for fiat currency, or using it purchase services or goods – would constitute it as a CGT event.
This is the framework that has been the go-to for taxing cryptocurrency transactions all over Australia for more than a decade. The recent ruling offers a major challenge to that approach, suggesting that Bitcoin essentially functions like money more than it does as property, which potentially exempts it from being a CGT event.
Digital Asset Tax Rules in Australia
In Australia, current tax rules come down to how a person uses those digital assets. That will determine what kind of tax implications there are for that asset. According to the ATO, “The most common use of crypto assets is as an investment (investors acquire and hold crypto assets to make a financial profit from holding or disposing of them). As a general rule, for investors: crypto assets are taxed as CGT assets, including for self-managed super funds (SMSFs) investing in crypto assets rewards for staking crypto are ordinary income for tax purposes.”
That said, there is an exemption to the rule. The exemption happens when these digital assets aren’t kept primarily for investment, but rather for personal use. The caveat here is that a capital gain on those personal use assets will be subject to CGT, particularly if it cost more than $10,000 AUS ($6,418 USD) to acquire.
Further clarification from the ATO: “A crypto asset (such as BTC, a cryptocurrency) is a personal use asset if you keep or use it mainly for personal use, for example, to buy items for personal use or consumption.”
The timing of the ‘disposal’ of digital assets is a determining factor. According to current rules, digital assets acquired and used in a short period of time – whether to buy items for personal use or consumption – is going to be considered a personal-use asset. Digital assets acquired and held for a prolonged period of time before being used would have a much tougher chance of being considered as a personal-use asset.
Given how most investors act when it comes to BTC and other digital currencies – speculative investments that are high-risk, high-reward rather than “personal use” items – traders and holders have traditionally been subject to CGT.
The ATO has had this stance on BTC taxation going back to 2014. Basically, when digital assets are exchanged, sold, or used to pay for services and/or goods, the holders of that asset will have to calculate and pay CGT.
This ruling from Judge O’Connell could be a major shakeup for the industry. With his classification, there can be far-reaching tax implications that affect millions of investors.
Implications of the Ruling
Though it is entirely speculative at this stage, Cartland has been vocal about the potential changes to come and how it could result in a complete shift from the ATO’s current standing. It is important to note that this ruling will go through the appeal process, but if it is upheld on appeal, it could result in a major shift in the cryptocurrency space.
Right now, it is hard to see what the next step is. The ruling could very realistically be overturned on appeal, after all. Given the far-reaching implications of a ruling like this, the current regulations could be amended to compare Bitcoin to a foreign currency rather than a local one. Doing so would still keep it in the current CGT realm.
Final Thoughts
Though there is still a long road ahead, this is a major milestone for crypto investors. The potential to erase CGT on BTC disposal would have major tax implications for investors, which could also lead to further inclusion and lowered barriers for those looking to potentially enter the marketplace at some point in the relatively near future.
