The Australian Taxation Office has provided guidance on several matters related to the taxation of cryptocurrencies, including the treatment of new tokens received through staking, airdrops, and chain splits. The guidance reflects the difference in treatment between personal investments and transactions involving cryptocurrencies and holding or using cryptocurrencies in the course of carrying on a business. However, while tokens acquired through mining cryptocurrencies as a hobby are only taxed on disposal, through the capital gains tax system, tokens received by an individual as a payment or reward for forging, staking, or voting are treated as ordinary income. Airdropped tokens are also treated as ordinary income. The disposal of such tokens will also trigger a capital gains tax event. New cryptocurrency received by an investor as a result of a chain split is only taxable on disposal, with the capital gains tax rules applicable to any resulting gain or loss.
Where cryptocurrency is held in the course of carrying on a business, the trading stock rules, rather than the capital gains tax rules, apply. Thus, the proceeds from the disposal of any cryptocurrency is ordinary income, and the cost of acquiring any cryptocurrency is deductible. Cryptocurrency used in business activities is treated the same as other assets or payments. Any new cryptocurrency received by a business as a result of a chain split is considered trading stock and subject to income tax.
The Australian Taxation Office (ATO) issued several rulings and began publishing nonbinding guidance on the application of Australia’s tax laws to Bitcoin and other cryptocurrencies in 2014. Since then, the guidance has been updated and the Goods and Services Tax (GST) legislation was amended in 2017 to remove double taxation of digital currencies.
Broadly, “cryptocurrencies are subject to capital gain tax (CGT) and ordinary income tax in Australia, depending on the circumstances of the transaction.” The ATO’s cryptocurrency guidance provides the following general information regarding transacting with cryptocurrency:
A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal can occur when you:> sell or gift cryptocurrency
> trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
> convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars, or
> use cryptocurrency to obtain goods or services.
If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded.
If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.
A. Investing in Cryptocurrencies
With respect to investing in cryptocurrencies, the guidance further states that,
[i]f you acquire cryptocurrency as an investment, you may have to pay tax on any capital gain you make on disposal of the cryptocurrency.
You will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its cost base. Even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.
If you hold the cryptocurrency as an investment, you will not be entitled to the personal use asset exemption. However, if you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.
This reflects the fact that, under existing legislation, “cryptocurrency is considered to be a capital asset” for tax purposes, rather than a form of money or currency.
B. Personal Use Asset
The ATO explains that “[c]ryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption.” If it is kept or used mainly as an investment, in a profit-making scheme, or in the course of carrying on a business, it will not be considered a personal use asset and will be subject to tax.
C. Capital Gains Tax
ATO guidance on capital gains explains that,
[f]or most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset. (The cost base of a CGT asset is largely what you paid for it, together with some other costs associated with acquiring, holding and disposing of it.)
There are three methods for working out a capital gain, including a discount method for assets held for 12 months or more.
D. Cryptocurrency Used in Operating a Business
As indicated above, where cryptocurrency is held in the course of carrying on a business, this is treated differently for tax purposes compared to personally investing in cryptocurrencies. The ATO provides separate guidance on determining whether a person is operating a business, as well as specific guidance on the tax treatment of cryptocurrency used in business. Broadly, “[i]f you hold cryptocurrency for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.” Furthermore,
[i]f you are carrying on a business that is not a cryptocurrency business, but use cryptocurrency in your activities you need to account for cryptocurrency as you would for other assets or items used in your business.
If you receive cryptocurrency for goods or services you provide as part of your business, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income. This is the same process as receiving any other non-cash consideration under a barter transaction.
E. Salary Payments
Salary or wage payments in the form of cryptocurrency may be regarded as either ordinary income or a fringe benefit, depending on whether the employee has a valid salary sacrifice arrangement with the employer.
The difference in the tax treatment depending on whether or not the cryptocurrency activities involve carrying on a business is also applicable in the context of cryptocurrency mining: Where a person mines cryptocurrency as a hobby, mined coins do not need to be reported as income; taxes are only payable upon their disposal (i.e., a CGT event). Business miners, however, must report the fair market value of the tokens received at the time of receipt, and may deduct mining-related business expenses, such as equipment and electricity.
G. GST Treatment
There is also a difference in the GST treatment of cryptocurrency depending on the type of transaction and the nature of the parties involved:
Sales and purchases of digital currency are not subject to GST from 1 July 2017. This means that you do not charge GST on your sales of digital currency and similarly, you are not entitled to GST credits for purchases of digital currency.
You do not have any GST consequences in relation to buying or selling digital currency, or using it as a payment, if you are not carrying on a business.
If you are carrying on a business in relation to digital currency, or as part of your existing business, or if you are accepting digital currency as a payment in your business, you need to consider any GST consequences that may arise.
The ATO further explains the GST treatment of sales of digital currency, and of receiving digital currency as payment, and provides several examples.
II. Tax Treatment of Block Rewards
The ATO website provides specific guidance on staking rewards and similar mechanisms that provide rewards to existing token holders:
Proof of Stake is a form of ‘consensus mechanism’ that requires forgers (similar to miners) to hold units of a cryptocurrency so they can validate transactions and create new blocks. Forgers participate in consensus by staking their existing tokens.
A forger who is selected to forge a new block is rewarded with additional tokens when the new block has been created. The additional tokens are received from holding the original tokens. The money value of those additional tokens is ordinary income of the forger at the time they are derived.
Other consensus mechanisms that reward existing token holders for their role in maintaining the network will have the same tax outcomes. This would include rewards derived through Proof of Authority and Proof of Credit mechanisms by Validators, Agent Nodes, Guardian Nodes, Premium Stakers and other entities performing comparable roles.
Token holders who participate in ‘proxy staking’ or who vote their tokens in delegated consensus mechanisms, and receive a reward by doing so, also derive ordinary income equal to the money value of the tokens they receive.
The ATO also provides an example of the application of the rules to staked tokens:
Anastasia holds 50,000 NULS tokens, which she stakes to a NULS pool as a premium staker. Anastasia receives additional NULS tokens when her pool participates in consensus, including a small payment of tokens from the node leader for supporting their node.
The money value of the additional NULS tokens Anastasia receives is assessable income of Anastasia at the time the tokens are derived.
The cost base of Anastasia’s additional NULS tokens will be their market value at the time they were derived.
Therefore, cryptocurrency rewards received through forging, staking, or voting are treated differently from tokens acquired through mining as a hobbyist: the reward tokens are treated as ordinary income on receipt. The sale of such tokens in the future will also trigger a CGT event.
III. Tax Treatment of Airdrops and Chain Splits
The ATO’s guidance includes a brief reference to airdrops, stating that
[s]ome projects ‘airdrop’ new tokens to existing token holders as a way of increasing the supply of tokens (for example, Pundi X and Tron). The money value of an established token received through an airdrop is ordinary income of the recipient at the time it is derived.
The following example is provided:
Merindah has held TRX tokens since December 2018, entitling her to receive monthly BTT airdrops from February 2019.
The money value of the BTT tokens Merindah receives as a result of holding her TRX tokens is assessable income of Merindah at the time the tokens are derived.
The cost base of Merindah’s airdropped BTT tokens will be their market value at the time they were derived.
Thus, airdropped tokens are treated the same as staking rewards for tax purposes. A question submitted to the ATO Community forum in October 2020 sought clarification of the tax treatment of staking rewards, airdrops, and farming rewards, including their classification as ordinary income on receipt and the situation where such rewards are sold at a loss in the future. The ATO community manager responded as follows:
Generally yes, they are classified as ordinary income where the cryptocurrency receipt arises from either undertaking activities that result in payment, or payments arising because of your ownership of particular cryptocurrency. We have information on our website on Staking rewards and airdrops.
Where you have declared the received cryptocurrency as income, the ‘cost’ of the received cryptocurrency will be its market value at time of receipt- on the assumption that you are not carrying on a business of trading the cryptocurrency. In these circumstances, where you hold the cryptocurrency as an investment, when you sell the cryptocurrency at a loss you can offset any capital losses arising against any current year or future year capital gains.
B. Chain Splits
The ATO guidance also explains the tax treatment of new cryptocurrency received as a result of a chain split, with the treatment depending on whether the new cryptocurrency is held as an investment or in a business carried on by the holder. It provides three examples of investment scenarios. The ATO states that “[a] chain split refers to the situation where there are two or more competing versions of a blockchain. These competing versions share the same history up to the point where their core rules diverged.”
1. Cryptocurrency Held as an Investment
The ATO guidance states the following with respect to holding cryptocurrency as an investment and receiving new cryptocurrency as a result of a chain split:
If you hold cryptocurrency as an investment, and receive a new cryptocurrency as a result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the new cryptocurrency.
If you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it. When working out your capital gain, the cost base of a new cryptocurrency received as a result of a chain split is zero. If you hold the new cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount.
Working out which cryptocurrency is the new asset received as a result of a chain split requires examination of the rights and relationships existing in each cryptocurrency you hold following the chain split. If one of the cryptocurrencies you hold as a result of the chain split has the same rights and relationships as the original cryptocurrency you held, then it will be a continuation of the original asset. The other cryptocurrency you hold as a result of the chain split will be a new asset.
Where none of the cryptocurrencies you hold following the chain split has the same rights and relationships as the original cryptocurrency you held, then the original asset may no longer exist. CGT event C2 will happen for the original asset. In that case, each of the cryptocurrencies you hold as a result of the chain split will be acquired at the time of the chain split with a cost base of zero.
Therefore, new tokens received by an individual investor as a result of a chain split are treated similarly to those obtained through hobby mining, with additional considerations in terms of determining whether or not the relevant cryptocurrency involved is a new asset or a continuation of the original asset.
2. Cryptocurrency Held in a Business Operated by the Holder
The ATO guidance explains that
[a] new cryptocurrency you receive as a result of a chain split in relation to cryptocurrency held in a business you carry on will be treated as trading stock where it is held for sale or exchange in the ordinary course of the business. The new cryptocurrency must be brought to account at the end of the income year.
Prepared by Kelly Buchanan
Foreign Legal Specialist
 See Kelly Buchanan, Australia: Tax Office Releases Guidance Paper and Draft Rulings on Bitcoin, Global Legal Monitor, Law Library of Congress (Aug. 25, 2014), https://perma.cc/46H5-8XZ9; ATO TD 2014/25 Income Tax: Is Bitcoin a ‘Foreign Currency’ for the Purposes of Division 775 of the Income Tax Assessment Act 1997?, https://perma.cc/BZP7-GCKE; ATO TD 2014/26 Income Tax: Is Bitcoin a CGT Asset for the Purposes of Subsection 108-5(1) of the Income Tax Assessment Act 1997?, https://perma.cc/5C74-9VXR; ATO TD 2014/27 Income Tax: Is Bitcoin Trading Stock for the Purposes of Subsection 70-10(1) of the Income Tax Assessment Act 1997?, https://perma.cc/8DHV-A3YT; ATO TD 2014/28 Fringe Benefits Tax: Is the Provision of Bitcoin by an Employer to an Employee in Respect of Their Employment a Property Fringe Benefit for the Purposes of Subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?, https://perma.cc/X7M7-N4RN.
 Treasury Laws Amendment (2017 Measures No. 6) Act 2017 (Cth), https://perma.cc/V5UX-XDPE; Press Release, Hon. Scott Morrison, Removing the Double Taxation of Digital Currency (Sept. 14, 2017), https://perma.cc/58M8-HD26.
 Id. See also Mining Cryptocurrency, ATO Community, Knowledge Base (started Apr. 3, 2018, by ClareH; modified Sept. 5, 2019, by JodieH), https://perma.cc/EHN3-HEXD; Can Cryptocurrency Be a Personal Use Asset?, ATO Community, Knowledge Base (started Feb. 16, 2018, by AmandaE; modified Oct. 21, 2019, by KylieATO), https://perma.cc/QS8T-6N4R.
 Starting Your Own Business: Are You in Business?, ATO, https://perma.cc/WP7A-HF7H. See also Difference Between a Business and a Hobby, business.gov.au (last updated Nov. 5, 2020), https://perma.cc/4QPS-ZVSQ.
 Chandrasekera & Loda, supra note 3.
 Tax Treatment of Cryptocurrencies in Australia—Specifically Bitcoin: Staking Rewards and Airdrops, supra note 19.
Last Updated: 02/05/2021