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‘Fundamental mistakes’ spied in cryptocurrency regulation

‘Fundamental mistakes’ spied in cryptocurrency regulation

The tax office’s approach to regulating cryptocurrencies, including recognising a capital gain event, contains fundamental administrative and logistical issues, according to one accounting boss. 

Tax&Compliance Jotham Lian 16 July 2018
— 1 minute read

Earlier this month, the ATO updated its information on the tax treatment of cryptocurrencies, including new guidance on the loss or theft of cryptocurrency, and chain splits.

On the latter subject, the ATO views that if you receive a new cryptocurrency as a result of a chain split, you do not derive ordinary income or make a capital gain.

The tax office notes that if you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it.

Speaking to Accountants Daily, Accodex chief executive, Chris Hooper, believes Western revenue authorities are making a few fundamental mistakes when it comes to regulating cryptocurrencies.

“I've got some disagreements with not necessarily the tax office's approach from a philosophical standpoint but from a practicality perspective, I think there is going to be some issues with respect to enforcement and keeping on top of the regulation in terms of opportunity cost on the path that they have gone down,” said Mr Hooper.

“[There is a] difference between recognising a CGT event on every conceivable currency or asset pair versus recognising the CGT event purely on a cash in cash out basis. Just by the sheer nature of cryptocurrency, it is going to be unavoidable that you actually swap between currency pairs several times over before you've actually effected a CGT event so there's some trouble from an administrative perspective in terms of how to actually account for that.

“But there are also some challenges from an enforcement perspective - how will the tax office even know if there was a CGT event?”

Further, Mr Hooper believes the nature of cryptocurrencies means they cannot be controlled or regulated unless they pass through traditionally regulated institutions like banks and brokerages.

“You can’t get a decentralised ledger and crypto asset that actually has no humans involved in it to report anything to the tax office and I think that's where the challenge is going to lie from a practicality perspective,” said Mr Hooper.

“There's going to be some practicality issues they will encounter over the next couple of years in particular when this becomes a larger sized asset class, because at the moment we're only talking about around $300 billion in assets… a lot of these issues will come to roost by the time you're talking in the trillions.”

The ATO has previously encouraged taxpayers to review cryptocurrency guidance for tax time 2018 as it looks to use existing and standard processes to address unexplained wealth and "conspicuous consumption" that may arise through profits derived from cryptocurrency investment.

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‘Fundamental mistakes’ spied in cryptocurrency regulation
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