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Understanding the legals of cryptocurrency
Since its development in 2009, cryptocurrency has revolutionised the world’s economy. Due to its growing popularity and value, it’s important that Australians understand what cryptocurrency is, how it is treated in Australia, as well as its legal implications on investments and businesses.
Okay first things first! What is cryptocurrency?
Cryptocurrency or ‘crypto’, refers to a digital currency platform where transactions are recorded and verified via an encrypted system known as cryptography. Cryptocurrency does not exist in a physical form and for the most part, operates via decentralised control, though some crypto is still controlled via a centralised authority.
There are currently over 7,800 cryptocurrencies in circulation today, with Bitcoin (BTC) and Ethereum (ETH) being two of the most prominent.Crypto provides investors with a diverse range of projects to invest in. In many places we are seeing it become more and more accepted as a form of currency either replacing or in conjunction with fiat currency. Nowadays crypto can be used to buy everything from coffee to real estate!
Cryptocurrency in Australia
Because cryptocurrency is not generally regulated by a central system, many countries and their legal systems have struggled to define and regulate crypto and its applications.
While it is legal to trade in cryptocurrency in Australia, crypto became subject to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 to regulate crypto service providers and ultimately reduce cases of related cybercrime and money laundering.
To date, the Australian Tax Office (ATO) does not consider cryptocurrency as Australian or foreign currency. Instead, the ATO views cryptocurrency as property or an asset which can be owned and sold and, as such, is subject to capital gains tax (CGT).
Cryptocurrency as an asset
Due to its categorisation as an asset, crypto has a significant impact on any matters concerning commercial, family or taxation law. This is especially pertinent when these matters involve:
- ownership of cryptocurrency,
- insuring cryptocurrency,
- issues/obligations arising from legal contracts,
- rights/obligations of corporate/private cryptocurrency owners
- cryptocurrency theft
- and fraud
Just like any other asset with tax implications, you can protect cryptocurrency using different holding entities. For example, instead of buying crypto in your personal name, you can buy it in the name of a company or trust to gain potential tax benefits or asset protection. As such, many law firms can now give advice on how to structure entities to best include crypto.
Cryptocurrency and smart contracts
As an owner of cryptocurrency, you also have access to the world of smart contracts. Smart contracts, like any contract, lay out the terms of an agreement or deal, but are written onto lines of code on a blockchain, rather than on paper. Smart contracts make use of blockchain security, reliability, and accessibility, to ensure all transactions are traceable and (largely) irreversible.
Smart contracts allow for the possibility of non-fungible tokens (NFT). NFTs are like unique versions of cryptocurrencies. One bitcoin is the same as any other bitcoin, but NFTs are all unique from one another. These are currently mostly being used as collectables, but have massive future potential for things like land/title ownership, identity verification documents, car registration – the list goes on.
Smart contracts also allow developers to build decentralised apps (dapps) including decentralised finance (or DeFi) tech, which allow crypto holders to engage in more common financial transactions, such as: earning interest, borrowing, lending and trading, without banks or other financial institutions taking a cut.
If you are interested in the financial and tax implications of cryptocurrency, make sure you consult a certified accounting team, such as our friends at CDG Accounting.
