More than ten years have passed since the world first saw the Bitcoin electronic coin, which was practically worthless. Nowadays, Bitcoin is worth several tens of thousands of dollars, and there are more than a thousand coins on the cryptocurrency market. Moreover, new projects in the cryptocurrency sphere are launched, such as coins, exchanges, and others, every month. Thereby, one witnessed the birth of a new economic and financial department, which is incomprehensible to many people. However, today, investors earn good money on cryptocurrency, thus, the aim of the paper is to analyze the cryptocurrency taxation system using the example of Australia.
Cryptocurrency’s Working Principles
A few years ago, one could not have imagined that the cryptocurrency market would have such capitalization, and investors would make a fortune on it. Such popularity is explained by the fact that investors saw cryptocurrencies as an opportunity to bypass traditional financial systems1. Thus, the cryptocurrency market has become attractive for financiers, investors, and private entrepreneurs. In January 2022, the capitalization of the cryptocurrency market was USD 2,23 trillion2. Other researchers inform that all crypto assets, including tokens and coins, are worth more than 2,6 trillion U.S Dollar3. Moreover, the market will grow over the next several years as the popularity of cryptocurrencies grows and more projects are attached to them.
Cryptocurrencies use the blockchain mechanism, namely, electronic numerable powers, for the operation of electronic contracts. Although the technology is complex and sophisticated, it has its drawbacks. For the performance of cryptocurrency farms, on which the process of mining cryptocurrencies takes place, large capacities are needed. This is not economical in the context of energy consumption and electricity utility. Besides, the operation of the crypto-farm is characterized by seeing a large amount of heat from video cards and devices involved in the process. If one considers a large number of large-scale cryptocurrency farms, then together, they can provoke a rise in temperatures in the future.
The pricing policy of cryptocurrency depends on its popularity and has a similar working principle to stocks. Depending on the brand, advertising, blockchain method, and the number of assets, the price of a new cryptocurrency can both skyrocket or fall after entering the market. Although it seems that cryptocurrencies do not have any impact on the ecology of the planet, researchers doubt it. Thus, the energy footprint of energy-intensive conventional cryptocurrencies provokes public concerns due to ecological damage4. Similarly, it is explained by the result of the crypto farms’ performance, namely, increased consumption of electricity and emissions of heat and substances into the atmosphere. In addition, due to the popularity of crypto farms, the demand for video cards has increased, the production of which has some negative consequences for the environment.
The Taxation Policy in Australia
Further, today, transactions using cryptocurrencies have a large capitalization, which necessitates the need for increased security. As the popularity of cryptocurrency transactions is growing, the number of fraudulent cases and illegal transactions is rising5. Illegal transactions include payments for unlawful services and goods, such as weapons or drugs. Additionally, cryptocurrency transactions are often used for financial deals on the black market, including large amounts. Fraudulent schemes involve deception with the participation of cryptocurrencies or the robbery of a crypto exchange. It involves hacking the security of a cryptocurrency exchange with the subsequent appropriation of other people’s crypto assets. However, today in case of user losing one’s crypto assets investigators can track addresses to identify the destination6. It promotes a relative security in keeping one’s holdings in cryptocurrency.
Considerable financial activity in cryptocurrencies implies the need for a mechanism for regulating financial flows. One of these mechanisms was taxation, however, when developing the principles of work, some difficulties arise, taking into account the specifics of the electronic currency. In Australia, one should declare the transactions on one’s tax return, or profit, every time when used, sold, or traded any cryptocurrency7. Moreover, ATO (Australian Taxation Office) estimates from 500,000 and 1 million residents in Australia have their assets in cryptocurrency8. Thus, the relevance of this issue lies in the need for centralized taxation of this new type of asset, which would effectively replenish the state treasury.
The taxation process in the cryptocurrency sphere is characterized by some confusion and complexity. In Australia, a person is not required to pay tax for cryptocurrencies in absolutely all cases. Thus, cryptocurrency is not a personal use asset if it is an investment, part of profit-making scheme, the course of carrying business9. However, in all other cases, it should be taxed as a process that generates income and is associated with cryptocurrency. Moreover, the individual must keep all the records related to cryptocurrency transactions.
Opinion about the Actions of Tax Authorities
To ensure that crypto-activities are correctly taxed, revenue authorities develop strategies and methods to improve existing tax legislation. In addition, audits are conducted on the activity of citizens in the field of cryptocurrencies. There are systems in Australia whereby income generated from cryptocurrency transactions will be visible to the relevant authorities. It allows one to pursue a taxation policy effectively and correctly in the direction of electronic coins. Besides, my opinion about the tax authorities trying to catch all the taxpayers partaking in the cryptocurrency world is formulated by existing taxation practices. Thereby, if one develops improvement strategies on existing models, it will be possible to control all of the cryptocurrency spectrum, which characterizes its effectiveness.
To conclude, it is essential to understand the difference between a trader and an investor. A trader is a person who purchases a cryptocurrency for quick resale in order to earn money on the exchange rate difference. An investor is an individual who has acquired a cryptocurrency for long-term storage because one believes that this cryptocurrency will rise in price significantly in the future. Thereby, the ATO will tax one as a trader if one earns an income by crypto-trading exchange, mining business, or regularly buying and selling cryptocurrency for short-term gains10. Thus, these are the fundamentals of cryptocurrency taxation policy in Australia.
ATO (Australian Taxation Office). 2022. Cryptocurrency and Tax. Web.
Boru Ren, and Brian Lucey. 2022. A Clean, Green Haven?—Examining the Relationship between Clean Energy, Clean and Dirty Cryptocurrencies. Finance Research Letters.
—. 2022. Do Clean and Dirty Cryptocurrency Markets Herd Differently? Finance Research Letters.
Chaitra Anand. 2022. How Crypto is Taxed in Australia: All You Need to Know. Yahoo Finance.
Etax Accountants. 2022. Crypto Tax Australia.
Haaron, M. Yousaf. 2022. Investigating Transactions in Cryptocurrencies. University College London.
Hiroki Kanezashi, Toyotaro Suzumura, Xin Liu, and Takahiro Hirofuchi. 2022. Ethereum Fraud Detection with Heterogeneous Graph Neural Networks. National Institute of Advanced Industrial Science and Technology.
Md Akhtaruzzaman, Sabri Boubakerb, Duc Khuong Nguyen, and Molla Ramizur Rahman. 2022. Systemic Risk-sharing Framework of Cryptocurrencies in the COVID–19 Crisis. Finance Research Letters.
Nektarios Aslanidis, Aurelio F.Bariviera, and Óscar G.López. 2022. The Link between Cryptocurrencies and Google Trends Attention. Finance Research Letters.
Swyftx. 2022. Crypto Tax Australia Guide.
- Nektarios Aslanidis, Aurelio F.Bariviera, and Óscar G.López, “The Link between Cryptocurrencies and Google Trends Attention” (2022), Finance Research Letters.
- Md Akhtaruzzaman, Sabri Boubakerb, Duc Khuong Nguyen, and Molla Ramizur Rahman, “Systemic Risk-sharing Framework of Cryptocurrencies in the COVID–19 Crisis” (2022), Finance Research Letters.
- Boru Ren, and Brian Lucey, “Do Clean and Dirty Cryptocurrency Markets Herd Differently?” (2022), Finance Research Letters.
- Boru Ren, and Brian Lucey, “A Clean, Green Haven?—Examining the Relationship between Clean Energy, Clean and Dirty Cryptocurrencies” (2022), Finance Research Letters.
- Hiroki Kanezashi, Toyotaro Suzumura, Xin Liu, and Takahiro Hirofuchi, “Ethereum Fraud Detection with Heterogeneous Graph Neural Networks” (2022), National Institute of Advanced Industrial Science and Technology.
- Haaron, M. Yousaf, “Investigating Transactions in Cryptocurrencies” (2022), University College London.
- Etax Accountants. “Crypto Tax Australia” (2022).
- Swyftx. “Crypto Tax Australia Guide 2022” (2022).
- ATO (Australian Taxation Office). “Cryptocurrency and Tax” (2022).
- Chaitra Anand, “How Crypto is Taxed in Australia: All You Need to Know” (2022), Yahoo Finance.