Key points
- Digital assets include cryptocurrencies, non-fungible tokens (NFTs), central bank digital currencies and security tokens.
- The purchase of digital assets creates taxable events.
- Accountants lack a history of knowledge around the treatment of digital assets.
- The IPA Demystifying Digital Assets conference takes place on October 17, 2024.
It is not unusual for accountants to have to seek retraining, upskilling or special advice around novel areas of practice, says Dr Elizabeth Morton MIPA, a senior lecturer and Research Fellow at RMIT University.
“We’re in a fast-evolving technology landscape, including an internet environment that has moved from being read-only, to read/write with Web 2.0, and now read/write/own with Web 3.0,” she says. “The way the technology has moved is that it now encapsulates an ability for property rights and ownership.”
This novel technological environment creates complexity as there is no human intermediary nor is there a need for other traditional intermediaries, such as a bank, or the ASX’s CHESS system.
Technology has broken down barriers that have traditionally been an important part of the regulatory infrastructure. This makes the concept of tax more difficult to define.
“We’re not just at the read/write/own stage, we’re at the read/write/own/tax stage,” says Morton, one of the experts presenting at the IPA’s Demystifying Digital Assets conference on October 17.
“By enabling ownership of digital assets, we’re creating taxable events and activities. People don’t appreciate that in the same sense as they do with physical assets, because it doesn’t look or feel the same. For some, there’s a sense that it’s not really taxable.”
What are digital assets?
According to the PwC report, Demystifying cryptocurrency and digital assets, a digital asset is “anything minted and exchanged on a blockchain”. The report says such assets tend to exist in five main categories. These include:
- Crypto assets – any digital store of value, typically for investments or payments;
- Stablecoins – linked to fiat currencies, commodities or assets, usually to enable cross-border payments;
- Non-fungible tokens – a token that certifies ownership of a unique digital item, such as a digital artwork, a game avatar or a piece of virtual real estate;
- Central bank digital currencies – Digital representation of a nation’s fiat currency; and
- Security tokens – tokenised versions of real-world investments such as stocks, bonds or real estate.
These assets have real-world value.
So, why is there sometimes a perception that digital assets are not taxable? This comes down to a variety of reasons, Morton says.
“There’s an element of people seeing the purchase of digital assets as a little bit like gambling,” she says. “Instead of buying a lottery ticket, they’re buying crypto.”
There is also the fact that some of the items being commodified in the digital realm have previously not been considered worthy of value, such as avatars for digital gaming.
“Some businesses are engaging in digital assets more formally, including paying wages in crypto,” she says.
“What does that mean from a taxation perspective? It adds a level of complexity, because not only do you have volatility in value, but you’ve got something that’s not in dollars to begin with. So, you’ve actually got a market valuation issue.”
Morton poses the question about how to define market value for an intangible item.
“How do we define this? Is it fringe benefits? Is it ordinary wages? We end up asking traditional questions around a novel technological setting,” she says.
“And as accountants we are used to this. In learning accounting concepts, we’d talk about widgets from a factory. The widget reflects a hypothetical, physical thing or product to answer a particular question. Today, that widget is a digital asset.”
Digital assets: Developing new knowledge
The challenges Morton and her co-presenters will be working through at the conference are not just intended to give attendees a clearer understanding of the challenges and solutions around accounting for digital assets. They will also help to develop a valuable “history of knowledge”.
“Part of the problem is that we don’t have years of case law pertaining to circumstances relating to crypto,” she says. “This means there is an inherent uncertainty, because when we start unpacking traditional questions about whether it is ordinary income, for example, there is a difference of opinion but no history of knowledge to apply to it.”
Morton says that “not only are we dealing with traditional concepts applied to a new thing, but we’re also not necessarily experts in the technology itself”.
She will explore all the hurdles and workshop solutions to help attendees grasp the implications of this area.
“This is messy,” Morton says. “When you look at other things that have been introduced, like GST or single touch payroll, they’re things that are honed into businesses. But digital assets can have much broader impact.”
Morton says this has implications for estate planning self-managed and super funds. “Think about estate planning when a person has passed away, and what may happen if the records of their private key are not locatable,” she says. “Now, nobody has access to their digital estate. What happens then? What if digital assets are brought into the self-managed super funds? The consequences to contemplate are broader than simply understanding the tax implications.
“There are a lot of interrelated and complex areas to consider when it comes to digital assets, and what we need to do now is bring them to front of mind and begin to move towards a better understanding.”
To register for the IPA Demystifying Digital Assets conference, click HERE.
