Crypto assets to be specifically excluded from foreign currency

Exposure draft legislation has been released to specifically exclude crypto assets from being foreign currency under income tax laws.

The intention of the draft legislation is to remove uncertainty surrounding crypto assets following the decision of the Government of El Salvador to adopt Bitcoin as a legal tender.

If it comes into effect, the legislation will be retrospective. It will apply to income years that include 1 July 2021 and any following income year, meaning that crypto assets will retain their current status regardless of the decree issued in El Salvador - meaning that you cannot use foreign currency rules in relation to your crypto assets.

Effect of draft legislation

The draft legislation effectively means that the income tax treatment of digital currencies will depend on your individual circumstances. Typically, a digital currency such as Bitcoin will be held on capital account.

Where a digital currency is held on capital account, any disposal of that currency would be subject to capital gains tax rules.

There is some ability for individuals to claim that their digital currency is trading stock for the purposes of income tax laws. However, clearly crypto assets are not always trading stock, even if you are an investment trader. For crypto assets to be considered trading stock, you generally will have to prove that you are conducting a trading business.

There is significant case law in relation to this issue, which we would be happy to look into and apply to your circumstances if you wish.