By Stuart Ridley

The first Bitcoin was created in 2009. In the following years, cryptocurrencies were hyped as the next big thing for commerce. By 2017, cryptocurrencies had become a mania, with one Bitcoin worth US$19,783.

That bubble burst, but there are still plenty of major institutions and regulators that anticipate big developments in the cryptocurrency space.

Today there are more than 1600 cryptocurrencies, including Bitcoin, Ethereum, Ripple, EOS, Litecoin and Tether. Bitcoin is still the largest network... but for how long?

In April 2019, China announced plans to ban Bitcoin mining. In June, Facebook and its partners – including Mastercard, Visa, PayPal, and Uber – announced plans to launch its global cryptocurrency Libra in 2020.

However, US Federal Reserve chair Jerome Powell says Libra raises a host of “serious concerns” around “money laundering, consumer protection and financial stability”. It may take longer than 2020, but sooner or later it seems cryptocurrencies are set to go mainstream.

How cryptocurrencies work

Figure 1. How cryptocurrencies work (Click image to enlarge). Image source: “Making sense of bitcoin, cryptocurrency and blockchain”, PwC.

The easiest way to think of cryptocurrencies is as a form of electronic money. But there are usually only a fixed number of digital currency ‘coins’ or ‘tokens’ available, so their value goes up and down according to supply and demand.

For example, the value of Bitcoin, the best-known cryptocurrency, hit a peak of US$19,783 per Bitcoin in December 2017. By July 2019, it was US$9812.

Each unit of cryptocurrency, aka ‘coin’ or ‘token’, exists on its unique blockchain – an encrypted string of data blocks (the basis of distributed ledger technology). The chain of blocks is sequenced by permanently attaching part of a unique code sequence from the previous block into the next block added to the chain.

The big innovation with cryptocurrencies is users can transfer assets across the internet without having to go through a centralised third party, such as a bank. That relative anonymity has made cryptocurrencies very attractive to criminals.

Virtual currencies can be bought or sold on an exchange platform using conventional money. Some popular cryptocurrencies, such as Bitcoin, can be bought or sold for cash through dedicated ATMs (there are more than 4500 Bitcoin ATMs worldwide.)

Users manage their digital currency holdings in a ‘wallet’, but these wallets don’t hold any currency – those are held in the relevant currencies’ blockchains. Instead, the wallet is a software program that contains the keys and tools for connecting to cryptocurrency blockchains so a person can check balances and conduct transactions.

Key moments in the history of cryptocurrency

Australian tax and cryptocurrencies

The Australian Taxation Office (ATO) published its cryptocurrency guide in November 2018, noting that a capital gains tax (CGT) event occurs when a person disposes of cryptocurrency, including:

• sale or gift
• trade or exchange
• conversion of cryptocurrency to fiat currency (such as A$)
• buy goods or services using cryptocurrency.

If a capital gain is made on the disposal of a cryptocurrency, some or all of the gain may be taxed. If the disposal occurs as a normal part of business, the profits are treated as ordinary income.

See Tax treatment of cryptocurrencies in Australia – specifically bitcoin.

“There are plenty of major institutions and regulators that anticipate big developments in the cryptocurrency space.”

New Zealand tax and cryptocurrencies

New Zealand Inland Revenue announced in 2017 that it treats cryptocurrency as property for tax purposes, but will continue to update its guidance. Rules include:

For tax purposes, cryptocurrency is property, not currency. This means foreign currency gain or loss provisions do not apply.

Cryptocurrency received as payment for goods or services is business income, which is taxable. You’ll need to calculate the cryptocurrency value in New Zealand dollars (NZ$) at the time it’s received.

Tax applies for any disposal that creates a realised gain or loss, including swapping one type of cryptocurrency for another, or exchanging it for any conventional currency.

See Cryptocurrency and tax.

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