Introduction
Today, the financial systems of separate states and other aspects of the economy are improving and progressing in the context of globalization, the spread of IT technologies, and general computerization. In this regard, new financial institutions, tools, and forms of interaction between people emerged. Additionally, the analog of traditional payments – cryptocurrency and its most common digital cash, ‘bitcoin’ appeared. The existence of a large volume of cryptocurrencies and the rapid change of exchange rates require constant monitoring of their movement and identification of current trends in monetary systems in the world market.
However, today there are many unresolved issues on methodological and legal issues in this area. Attempts to effectively regulate cryptocurrencies vividly illustrate the problems faced by government agencies around the world, not only when creating a legal platform for business, but also when trying to define decentralized systems. It is essential to find out what other reasons led to the emergence of a new payment method, what this phenomenon is, and how it is used, regulated, and taxed.
Cryptocurrency: the Essence and How It Works
The monetary system has shown extreme instability during the global financial crisis of 2008-2009. At this time, confidence in the US dollar weakened, and the idea of creating new currencies, including regional ones, emerged in society. At that time, the peer-to-peer payment system Bitcoin,’ developed by Satoshi Nakamoto, began to take shape, and the term ‘cryptocurrency’ was used for the first time (Younus 2021, 8).
Although it was a local cryptocurrency at the beginning of its development, used only by a limited number of people (its founders and their affiliates), it has become a world-class system in a few years. Electronic money is usually defined as financial obligations that are exchanged and settled with information technology. Summarizing the various positions and interpretations of the definition of cryptocurrency, several basic approaches can be distinguished.
First of all, it can act as currency, an analog of fiat money, as at the moment, bitcoin can be used to pay for any goods. Cryptocurrency can also act as money surrogates, such as bills of exchange, checks, and other financial instruments. Given that it is generated online, it can also act as a commodity, property, or different asset with its value. In addition to being a method of payment, cryptocurrency can also serve as a means of accumulation and savings. For example, nowadays, in addition to exchanges, exchangers, and Internet resources, some stores and service centers also conduct bitcoin transactions.
They are accepted for payment in many restaurants and hotels in some states. Several Asian countries are even used as an alternative to bank accounts and plastic cards because banking services are pretty expensive (Frankovic, Bin, and Suardi 2021, 3). Having defined the essential characteristics of cryptocurrency, it is crucial to understand its method of operation, which consists mainly of encryption in a decentralized system.
For the first time, cryptography methods were applied in the payment system ‘Digi Cash’ in 1990 by its founder David Chomm. It was done to ensure the security and confidentiality of payments made. Later Satoshi Nakomoto proposed a new bitcoin payment system based on ‘Blockchain’ technology with the elements of a cryptographic cipher, the so-called ‘hash code’ (Pernice and Brett Scott 2021, 6).
Hashing means entering preliminary information of any size and getting the output of the transformed result into some code with a specified required size. It is a multilevel and multifunctional information technology designed for reliable accounting of different assets, including storage, communication, and archiving functions. In the case of cryptocurrencies, blockchain acts as a distributed registry in which validated transactions are stored in blocks linked together in a single chain. In this matter, through complex calculations, all information about transactions acquires a unique kind of hash code.
Despite the complex mining process, cryptocurrency continues to spread its influence around the world. Presumably, the main reason for the demand is its decentralized nature and the resulting features. If in a large bank, the principal supervisor of the reliability of money transfers is the bank itself, in digital currency, such supervisors are network participants – ordinary users. The next advantage is anonymity, it is possible to follow transactions and see how many bitcoins have moved from one wallet to another, but it is not easy to determine who exactly owns them (Co 2021, 6). Anyone can open a bitcoin account; people need the right software and access to the Net. It is also not afraid of inflation, as the total number is known in advance and is limited.
At the initial stage of cryptocurrency emergence, the attitude of governments to them was sharply negative; many states began to prohibit it and introduce responsibility for payments in cryptocurrency. Then, realizing that the process of issuing bitcoins is impossible to control, states made attempts to regulate their circulation and taxation. Moreover, the situation has changed radically: international lawmakers tend to consider cryptocurrencies as a new promising direction in the market rather than an uncertain currency surrogate in the shadow economy. Australia is also among the countries seeking to provide a favorable environment for developing the cryptocurrency industry and creating its own financial and technological centers (Co 2021, 6). However, the problem of taxation still exists.
Electronic money is an entirely new phenomenon in the world, so there are no effective control mechanisms. In this regard, each state is testing its methods according to national characteristics, and this is a complex process that needs time and resources.
Cryptocurrency Taxation
The Reserve Bank of Australia 2013 determined the bitcoin cryptocurrency as an alternative to currencies of different countries and a payment system. However, digital currency (cryptocurrency) is not considered a financial product by the Australian Securities and Investments Commission. Money activities, such as mining, or its use as a means of payment or exchange, are not subject to licensing. According to the Australian Digital Currency Industry Code of Conduct developed by the Australian Digital Currency & Commerce Association, the proper standards of cryptocurrency business are set and binding only on the members of the Association.
The organization itself can impose penalties on its members if they violate the Code. In 2014, the Australian Taxation Office noted the possibility of introducing taxation of cryptocurrency transactions (AT0 2021). Presently, cryptocurrency transactions in Australia are subject to average income and Corporate Taxes.
At the same time, when accepting cryptocurrency as an investment, there is no need to pay Capital Gains Tax. However, it is constitutionally possible in Australia to pay wages in cryptocurrency, but only if a contract exists between the employee and the employer. In addition, Australia is actively developing anti-money laundering and financing legislation to regulate the activities of cryptocurrency exchanges, which would be an effective response to crimes committed with the use of cryptocurrency. Thus, the relevant information is that cryptocurrency in Australia will be taxed. However, a few transactions are exempt from the capital gains tax, which is a concern for financiers (Johnson 2021, 15). Therefore, the tax system states that if a corporation receives payment for services and goods in the form of cryptocurrency, it will be counted as part of ordinary income. Accordingly, the value in Australian dollars will be the cryptocurrency’s market price that can be obtained on a reputable cryptocurrency exchange.
Although, when purchasing a business with cryptocurrency, companies are entitled to a tax rebate based on the market rate of the purchased item. However, the application of cryptocurrency for commercial purposes can create tax consequences for capital gains. Currently, personal assets are also exempt from capital gains tax (PGT) if they cost less than $ 10,000. The Australian Tax Office (ATO) will agree that a cryptocurrency is an asset for personal advantage if it costs less than $ 10,000 and is used primarily to purchase goods and services (Johnson 2021, 15). Concerning the regulation of cryptocurrency when buying investments, the rules apply the same as to stock traders. The system assumes that if a business accumulates cryptocurrency to obtain a considerable profit, it is an investment.
Thus, the investment is not subject to the rules of personal practice and is subject to taxation. Although, there is a proclamation that if a company invests for 12 months or more, it is entitled to a 50 discount from CGT. However, ATO may consider a firm a cryptocurrency trader if the goal of business investment is to purchase and sell cryptocurrencies for short-term gain, not long-term growth. In this case, any income will be taxed as estimated income, and a 50% discount will not apply. Another tax transaction in Australia, exchanging one cryptocurrency for another, will also be considered a taxable event (AT0 2021). The first transaction is the trade of the first cryptocurrency, and the second is the purchase of another cryptocurrency (Strauss, Helena, Schutte, and Fawcett 2020). Even if corporations do not receive payment on hand, they will still have to pay tax on any income from the first cryptocurrency’s disposal.
The taxation system of mining is also essential due to the possibility of hiding benefits. In this case, any proceeds from the extraction of minerals will be considered as estimated income. Similarly, any costs incurred in mining activities will be deducted from any income received from the cryptocurrency mining business. The income tax for cryptocurrency miners varies depending on whether their extraction is a personal activity (hobby) or a business. This is decided in each case; hobbies are usually engaged in for relaxation, entertainment, or pleasure, not for business reasons.
ATO provides practices to determine whether cryptocurrency activities are related to business or not. A common question is how extensive a cryptocurrency mining operation must be to be classified as a transaction. It is crucial to remark that the Australian cryptocurrency tax in 2021 is complex because the ATO does not provide clear, precise rules on the scale of cryptocurrency quarrying operations. Instead, the ATO service is considering the intentions of the cryptocurrency mining operation (Strauss, Helena, Schutte, and Fawcett 2020). If the transaction is conducted on a market basis with the expectation of commercial viability of a trading plan, the transaction will likely be classified as a business.
Activities of Revenue Authorities to Ensure Proper Taxation in the Regions
The problem is that regulation on cryptocurrency has not been approved. Therefore, Australian law does not inspect cryptocurrency as capital. The Reserve Bank of Australia (RBA) does not plan to issue a central bank’s digital currency (CBDC) for retail customers. Therefore, the issue of proper taxation of cryptocurrency has been included in the Australian anti-money laundering system. Thus, this means that cryptocurrency commerce must be registered with the Australian Transaction Reporting and Analysis Centre (AUSTRAC) (Peláez-Repiso, Sánchez-Núñez and Calvente 2021, 95). Accordingly, this will serve to solve the problem of unification of the difference between the involvement of cryptocurrency for commercial and personal purposes.
At the same time, the ATO will regularly receive reports on cryptocurrency transactions so that people who trade cryptocurrency refund the appropriate amount of tax. Data that will include information on the purchase and sale of cryptocurrencies can also identify serious fraud and evasion of the black economy. The ATO operation estimates that between 500,000 and 1 million Australians have invested in cryptocurrencies (Brett Scott 2021, 6).
It is evaluated that most of them do not recognize their activities as commercial and do not pay additional tax. The Australian Tax Service has announced it has continued its partnership with Australian cryptocurrency exchanges, requiring them to submit their trading data by 2022-2023. In this manner, the authorities will be able to obtain a list of recipients of profits and assess who is involved in non-profit activities (Peláez-Repiso, Sánchez-Núñez and Calvente 2021, 95). Accordingly, the rest of the entrepreneurs will be noted warning to pay taxes. The means for this can be to send a pop-up message if people file their tax declarations through the myTax portal. Otherwise, reminders may be mailed to their registered tax agent to include cryptocurrency-related activities in the tax return.
Thus, the revenue authorities in the regions will be able to obtain a tax return that will include information from the cryptocurrency exchange. In conclusion, they will be qualified to legally differentiate between commercial business and demand payment of taxes. Such measures are highly effective for tax collection in the Australian states, but the officials must have reliable data from the cryptocurrency exchange to implement them.
Effectiveness of Methods Taken by Tax Authorities
As was stated earlier, almost no countries welcomed the emergence of a new method of payments. The trade and market capitalization levels of crypto-assets are increasing, and their technical characteristics are evolving rapidly, creating problems for tax administrations, one of which is anonymity. Generally, if it is possible to carry out an operation bypassing banks and state regulators, the attention of lawbreakers around this phenomenon is growing many times over.
Although this is a challenging issue, I believe that the measures taken by the Australian Tax Office are among the most effective. Firstly, very often, the reason for the non-payment of taxes by citizens is a lack of understanding of their obligations. Cryptocurrencies are a very new phenomenon, and many users do not know how to keep proper records of all transactions. To help taxpayers understand this, the ATO has published guidelines on several very detailed and practical topics. In my opinion, in this way, conscientious citizens get a real opportunity to comply with their tax requirements without spending much effort (Kabve 2020, 776).
However, those who deliberately ignore the requirements are now also at risk, as the ATO will collect data on cryptocurrency transactions from service providers. Comparing them with available records will help identify individuals who may not be fulfilling their obligations to reporting, submission, and payment for cryptocurrency transactions.
Anonymity and lack of practice remain a real challenge for the police and tax authorities. The system is not yet fully established, but it is clear that the regulatory system proposed by Australia is only becoming more effective and successful. Entering the Joint Global Tax Support Committee is also positive. It brings together key experts from different countries and allows to monitor and receive a large amount of data on transactions and share them. Thus, there are real opportunities to catch all taxpayers in the field of cryptocurrency; it is only a matter of time.
Conclusion
Assuredly, the explosive growth of bitcoin and other similar cryptocurrencies has become a popular investment choice in recent years. In recognition of the growth, people managed to earn and lose significant amounts of money in short periods.
Accordingly, there is a question about the tax regulation of profits from cryptocurrencies in Australia. At present, the law distinguishes between commercial income on which an additional tax is introduced and personal benefits, which are taxed under the general rules. However, there is no clear distinction between the two types of taxation, so companies and individuals often pass off commercial business as personal profit. Recently, negotiations have been held to obtain data on cryptocurrency transactions from trading exchanges, so it will be possible to track the amount of income. Thus, Australia is implementing effective tax methods that will operate effectively in the future.
References
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