By Harrison Dell, Director
Crypto tax continue to raise intricate tax questions for even the most normal transactions.
One common area of confusion is whether transferring cryptocurrency to and from exchanges constitutes a Capital Gains Tax (CGT) event. Understandably, most users think it shouldn’t trigger a CGT event as they are simply transferring their crypto from one account they hold to another, and one of those might be a wallet.
This has not yet been covered specifically by the Australian Taxation Office (ATO) in their November 2023 guidance, but is still a very common question that remains unanswered.
Keep in mind, this is an interpretation of the law as it currently stands. We do not believe this is good tax policy for Australia and are lobbying for change with the ATO, Treasury and Parliament.
Understanding CGT Events
Before assessing the tax implications of transferring crypto assets, it’s crucial to understand what a CGT event is.
CGT event A1 is by far the most common and it happens when an asset is sold, transferred or changes ownership to another entity. However, CGT event A1 does not happen where beneficial ownership of the asset is maintained. The gain or loss is the difference between the asset’s cost base (what it cost you to acquire it) and the capital proceeds (what you received when you disposed of it).
In general, a CGT event occurs when there is a disposal of the cryptocurrency. This includes selling the crypto for fiat currency, trading it for another cryptocurrency, or using it to purchase goods or services. Each of these actions involves giving up ownership of the crypto asset in exchange for something else, which constitutes a CGT event.
But does transferring it to a centralised custodian that operates a centralised exchange also trigger a CGT event?
Transferring Crypto to and from Exchanges
When you transfer your own cryptocurrency to an exchange, this act in itself is generally not considered a CGT event by most users. However, the technical legal analysis may not agree.
When you transfer a crypto asset to a centralised exchange, you no longer hold it. Therefore, it has changed ownership and CGT event A1 has happened. Many people say that the exemption applies, as you still have beneficial ownership of that asset.
However, to have beneficial ownership means that you are “absolutely entitled” to the asset. As seen from the recent and on-going FTX insolvency, people with crypto assets on FTX were considered unsecured creditors and may only receive cents on the dollar. This shows that the creditors were not the beneficial owners of the crypto assets, as otherwise they would rank first to recoup them under most insolvency regimes. Further, their assets could not have been lent to other entities for trading purposes, which occurred with Alameda Research.
Therefore, when crypto assets are transferred to a usual exchange, there is very likely a change in ownership or “disposal” of the asset at this stage for tax purposes. Despite the transfer being akin to moving shares from one brokerage account to another, due to the nature of legal rights and crypto assets, CGT is very likely triggered.
The capital proceeds should be the value of the right to redeem. This will usually be equal to the market value of the crypto asset being transferred in.
Similarly, transferring cryptocurrency from an exchange to your personal wallet or another exchange also constitutes a CGT event. The critical factor is that the ownership of the asset(the crypto asset) has changed, and you have disposed of your legal right to redeem. The transaction is merely a transfer of the location where the asset is held.
Example: Alice transfers 1 Bitcoin from her personal wallet to a trading account on a crypto exchange. Alice has ceased owning 1 Bitcoin, and now has the right to redeem an amount equal to 1 Bitoin (subject to the exchanges spot price of Bitcoin and solvency).
CGT event A1 has occurred as 1 Bitcoin was disposed of, and the capital proceeds were the legal right to redeem 1 Bitcoin worth of value.
Why is this not like other assets?
The CGT rules work identically for other assets, we just deal with them differently.
If you did the same thing with real estate, you’d have the same outcome. However, we don’t deal with real estate in this way, as instead we will either sell the property for cash or allow the bank to take a mortgage over the property to secure a loan. The loan isn’t a taxable event, though selling of course is.
Further, with Australian shares, these are held by either directly, or by a licensed custodian or CHESS sponsorship. Aside from directly, both a custodian and CHESS sponsored holdings mean you are still absolutely entitled to the asset. Share trading platforms do not have beneficial ownership of your shares, but with crypto exchanges, they do.
Seeking Professional Advice
Given the complexity and evolving nature of cryptocurrency regulations, it’s advisable to consult with a tax professional, especially if your transactions are complex or involve significant amounts.
You should obtain advice that is enough for a reasonably arguable position if you wish to claim that a transfer between centralised exchange accounts and wallets is not a CGT event.
From a policy perspective, transferring cryptocurrencies to and from exchanges should not typically trigger a CGT event in Australia as economically, nothing has changed. It is an inappropriate point to levy tax. Our view is that this is requires legislative change to ensure that Australian’s have the correct taxing point. This goes further to wrapping, staking and other smart contract functions which can also trigger CGT based on recent ATO guidance. We have strong opinions on the ATO website guidance published recently and interviewed by Forbes Advisor.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.