At a glance
By Rachel Williamson
Various types of digital assets have emerged from the crypto ecosystem, offering a range of unique features and uses.
Crypto investments can be a challenge to manage. Not all crypto assets are taxed and accounted for in the same way, and much depends on the asset type, the jurisdiction and how it is used.
1. Blockchain
To make sense of the crypto ecosystem, it is essential to understand the technology that underpins it – blockchain. A blockchain is a decentralised digital ledger that records transactions across multiple computers to ensure security and transparency.
“Decentralised” means that blockchain does not rely on a central authority such as a bank or government to validate its transactions. Instead, blockchain uses a network of participants (nodes) to collectively validate and maintain the ledger and verify transactions through consensus. Once a transaction is recorded on the blockchain, it becomes virtually impossible to alter it.
First-time investors may get confused between a blockchain “network” or platform and the native cryptocurrency on a blockchain network, as they are sometimes named the same way.
For instance, Ethereum is a blockchain network, but its native cryptocurrency, Ether (ETH), is sometimes referred to as Ethereum. Blockchain networks like Ethereum also support the creation of other types of coins and tokens through smart contracts and decentralised applications.
2. Cryptocurrency coins
Cryptocurrency coins, such as Bitcoin (BTC), Ripple (XRP) and Ether (ETH), are the original digital currencies that operate on their own blockchain networks. Much like blockchain, crypto coins are decentralised.
They function as mediums of exchange, allowing users to send and receive value directly without intermediaries.
Income tax laws generally treat transactions that involve cryptocurrencies as taxable events. In Australia, when used to buy and sell, cryptocurrencies are called trading stock by the Australian Taxation Office (ATO). If held as an investment, cryptocurrencies are considered a capital gains tax asset.
3. Stablecoins
Stablecoins seek to bridge the gap between the crypto ecosystem and traditional finance. Stablecoins, such as USD Coin (USDC) and Tether (USDT), are designed to maintain their stable value by pegging them to a real-world asset, such as a fiat currency, gold or a commodity.
For instance, MakerDAO’s DAI aims to maintain a stable value relative to the US dollar.
In various jurisdictions, as with cryptocurrency, using a stablecoin for a transaction can trigger taxable events that require the reporting of gains or losses.
4. Gaming tokens
Gaming tokens have gained popularity within the gaming industry. GALA, for instance, the native games token on the Gala Games platform, is used as an in-game currency. GALA enables players to buy virtual items, compete in tournaments and even trade with each other. Another popular gaming token is Decentraland’s MANA.
The tax treatment of game tokens can be complex. It is crucial to consider the potential tax consequences when converting virtual assets into real-world currencies or when significant profits are generated from token trading.
5. Non-fungible tokens (NFTs)
NFTs, such as Bored Ape Yacht Club (BAYC), were first created to give digital artists a way to sell their creations online. An NFT acts as a digital certificate of ownership over a unique asset on a blockchain, such as artwork, music or even virtual real estate.
NFTs went mainstream in 2021, when billionaires like Elon Musk and Jack Dorsey sold NFTs of their tweets. Each NFT is distinct, and they can’t be exchanged on a one-to-one basis.
Taxation of NFTs can be intricate, with factors like acquisition, ownership duration and subsequent sales determining the applicable tax treatment.
In Australia, NFTs might be viewed as personal use by the ATO if, for example, a person bought one of those multi-million-dollar tweets and gifted it to a friend. It could also be viewed as a capital asset in a business if used in the running of a company, or as a CGT asset if purchased as an investment or business income. However, it doesn’t count as a digital currency for GST purposes.
6. Utility tokens
Utility tokens act as digital coupons or vouchers and can be redeemed for products or services within a blockchain. GALA is both a games token and a utility token.
The Basic Attention Token (BAT) rewards users for engaging with ads on the Brave browser. Users earn BATs by viewing ads and can also use them to support content creators and publishers.
The use and acquisition of utility tokens may not necessarily trigger immediate tax consequences.
However, if utility tokens are subsequently sold or exchanged for other assets, taxation might apply. In Australia, the status of utility tokens is a grey area. If they end up traded on an exchange or a secondary market, they may become equivalent to a security.
7. Security tokens
Security tokens represent ownership or investment in traditional assets, such as shares, bonds, fiat currency and even real estate. They are divided into two major types – equity tokens and asset-backed tokens. One of the most well-known security tokens is INX, which is issued by the INX cryptocurrency exchange.
The INX exchange was one of the first to operate under a regulatory framework in the US. It obtained US Securities and Exchange Commission approval to offer the INX token and operate as a regulated trading platform.
Equity tokens are similar to shares but are the digital version. Asset-backed tokens are backed by assets such as art or carbon credits.
Security tokens are subject to securities regulations, and their issuance and trading must comply with relevant securities laws. Due to their nature as financial instruments, the tax treatment of security tokens is usually aligned with traditional securities, with considerations for dividends, capital gains, and other applicable tax obligations.
In Australia, the ATO suggests treating security tokens like shares, with the same CGT rules.
Resources
These resources provide more information about crypto assets, their risks and taxation across the crypto ecosystem.
- Crypto asset investments, ATO
- The risks of investing in crypto, Moneysmart
- The Words of Crypto, Binance Academy’s crypto glossary
- Cryptocurrency resource, Investopedia
- Non-custodial wallets vs custodial wallets, BitPay blog
It's important to conduct due diligence on all crypto investments and to seek appropriate advice and guidance before making any decisions. CPA Australia has a full range of tax time updates and resources.
