Blockchain Byte: is the sacrifice of your crypto assets a CGT event?


Posted By and on 5/06/23 at 2:22 PM

In the world of cryptocurrency users often come together for community-driven initiatives. In the past year, there has been a trend in users willingly sacrificing tokens to support projects with a shared vision. Often the sacrificed tokens are used to enable the entity controlling the protocol to issue a political statement. However, is this act of comradery in parting ways with your crypto assets, inadvertently triggering a tax liability?

In short – yes.

What does the Australian Taxation Office (ATO) say?

The ATO is yet to provide formal guidance on sacrifices but has ruled on the issue in a private binding ruling (PBR). PBRs are only binding on the taxpayer who applied for the PBR and who’s particular circumstances have been considered by the Commissioner. Nevertheless, they provide taxpayers more generally with guidance on how the Commissioner will apply the law.

In respect of the sacrificing tokens the Commissioner has deemed that it does in fact trigger a tax liability – specifically capital gains tax (CGT), and in particular, CGT event A1.

What does this mean for you?

The amount of tax payable when you dispose of a CGT asset depends on the asset’s cost base and the proceeds received. “Cost base” is the amount involved in acquiring and holding the asset, however there are strict rules as to what is included and excluded.

But your proceeds are nil? That may be true (acknowledging you may have some sort of right to a token in the future). However, you will in fact receive the market value of the asset, which is determined at the date of the disposal. For many taxpayers with tokens that have increased in value, this may mean a capital gain has resulted.

Being a CGT asset, there may be certain tax concessions available to reduce your tax bill. For example, where the asset is held longer than 12 months and is a capital asset. Traders in crypto generally hold their tokens on revenue account, meaning this concession would not apply. The rules are complex and seeking specialist tax advice is recommended.

Can I claim this as a political donation?

Contributions to political parties or politicians are deductible where made in your personal capacity to certain recipients. Whilst the controllers of protocols may use the sacrificed tokens to make a political statement, they do not qualify as a recipient of political donations for tax purposes. Therefore, your sacrifice is not deductible.

Don’t forget!

Remember, meticulous record-keeping is important. Maintain comprehensive records of acquisition costs, market values at the time of sacrifice, and any associated fees or expenses. Your attention to detail will not only minimise tax compliance errors but assist should you be audited by the ATO.

With the instability of some exchanges, it is also recommended that you regularly download copies of your data.

As the financial year draws to a close, now’s the time to review all your disposals—yes, even those heartfelt sacrifices made with good intentions. If you have questions about your tax position, please contact our Tax & Structuring team.

This article is part of the Blockchain Byte series by KHQ’s Tax & Structuring team. The series provides ‘byte-sized’ articles outlining key tax and structuring associated crypto assets as well as updates in the Blockchain space which regularly occur. To register for the latest byte and other tax and structuring news, click here to subscribe.

KHQ Lawyers - Laura Spencer

Laura Spencer Senior Associate

Laura is a lawyer in our Tax & Structuring team. She has worked in legal and advisory firms both in Australia and the UK, as well as at the State Revenue Office of Victoria... Read More

KHQ Lawyers - Harry Giannakidis

Harry Giannakidis Principal Solicitor

Harry leads our Tax & Structuring team. He has over 20 years’ experience in advising corporate clients, private family business groups (including SMEs and large family businesses) and high net... Read More