Cryptocurrency and Blockchain Explained

The Internet of money and so much more

What is bitcoin? What is cryptocurrency? What is the blockchain? What are smart contracts? What is decentralisation? What is cryptocurrency mining? What is proof of work? Who is Satoshi Nakamoto?

Understanding cryptocurrency

Cryptocurrency is a new asset class. Bitcoin is the first cryptocurrency released to the world in 2009 by inventor Satoshi Nakamoto using blockchain technology. Since then, people all across the world have used blockchain technology to develop their own cryptocurrency for a variety of different uses.

  • What is bitcoin?

    Bitcoin promises to be global digital cash. Money which is not controlled by any government or company. Some call it the people’s money or the Internet of money. It exists only in digital format and is not backed by any physical asset or government. Bitcoin has gained value because people give it value since it is useful to them, and also because there will only ever be 21 million bitcoin, which means unlike dollars no government or person can inflate the money supply. Wherever people have access to the Internet, they can send bitcoin to anyone in the world with similar convenience to sending an email.

  • Who is Satoshi Nakamoto?

    We don’t know. The inventor of bitcoin went by the name Satoshi Nakamoto. However, we don’t believe this is his real name. Satoshi communicated to the world on the Internet but stopped contributing many years ago. We don’t know whether Satoshi was one person, a group, or whether he or they are still alive. In the end, it doesn’t really matter, because bitcoin continues to be improved by many people all across the world.

  • What is cryptocurrency?

    Bitcoin is meant to be money and uses cryptography for security purposes, and so combining the words cryptography and currency we get "cryptocurrency". Now the world uses cryptocurrency to refer to similar assets. There are many thousands of cryptocurrencies, sometimes collectively referred to as altcoins (any cryptocurrency which isn’t bitcoin), including ether, dash, EOS, monero, augur, NEO. Although currency is in the name, many cryptocurrencies are not actually trying to be a new form of money, but rather using the underlying blockchain technology to provide other uses.

  • What is Ethereum?

    The Ethereum blockchain’s native cryptocurrency is called “ether” and is an example of a cryptocurrency whose primary goal is not to be money. Rather, ether is more akin to fuel which powers smart contracts on the Ethereum blockchain (more on smart contracts below). Some like to refer to Ethereum as the world computer. This is because it is a decentralised platform to run applications in a peer-to-peer environment over the Internet.

  • What is a smart contract?

    Very basically, a smart contract is a set of instructions which automatically execute a certain way depending on the outcome of something. A better term may be self-executing contracts. You agree to terms with someone, and then depending on whether A or B happens, the contract will execute as per the terms of the contract. So, if you agree to purchase my car for $20,000, we can use a smart contract whereby upon you depositing $20,000 into my account, ownership of the car immediately transfers to you. No middleman is required to execute the transfer, as it is automatically processed on the blockchain.

  • What is the blockchain?

    The blockchain is essentially just a publicly available ledger or book of records with a key characteristic being that once a record is placed on the blockchain it cannot be changed or deleted. When Person A transfers bitcoin to Person B, this transaction is written to the blockchain, which verifies that Person B is now the owner of that bitcoin. The breakthrough with blockchain is that this registry system is processed in a decentralised, permissionless and secure environment.

  • What is decentralisation?

    When talking about decentralisation and blockchain, we basically mean that no one entity, such as a government or bank, controls the system. Instead, many people across the Internet participate in verifying and securing the public ledger and do so in a permissionless manner. This means that no one has to go to a central party to ask permission to participate, since they can download and run the appropriate software to send transactions without asking for permission, and many miners spread out across the world secure the network without asking anyone for permission to do so.

  • What is mining?

    Cryptocurrency mining is the process of creating and securing the blockchain. Those people doing this are referred to as "miners". They operate computer hardware and software which receives, verifies and transmits valid transactions throughout the network. They also perform a “proof of work” function to build the blockchain. This means their computers are continually trying to solve complex puzzles and the first miner to solve each new puzzle provides proof and as a reward creates the next block in the chain, thereby securing the blockchain and settling transactions. Miners are incentivised to do this as the winning miner collects transaction fees and is permitted to create a certain amount of new cryptocurrency. Not all blockchains use the same method to secure the network and some, like bitcoin, require far more sophistication to participate compared to others.

Cryptocurrency and Australian Tax

Tax invades just about every aspect of life and cryptocurrency is no different. Australians will be asking: is cryptocurrency taxed in Australia?

  • Do I need to declare cryptocurrency?

    Yes, if you have made an investment into cryptocurrency then you’ll be required to declare gains on your tax return. Gains can arise from sale of cryptocurrency back to fiat (e.g. Australian dollars), using cryptocurrency to purchase goods or services or pay off your credit card bill, and when you convert one cryptocurrency to another (i.e. crypto to crypto trades).

  • Do I need to pay tax on cryptocurrency?

    If you’ve made a gain on bitcoin, ether or any cryptocurrency, then you’ll most likely have tax to pay. How much tax you have to pay depends on a number of factors including whether you are a trader or long term investor. If you owned the cryptocurrency outside of a company or superannuation, then your personal marginal tax rate will apply, which may be 0%, 21%, 35%, 39%, or 47%. If your company owns cryptocurrency, then the tax rate may be 27.5% or 30%. If your superannuation fund owns cryptocurrency, then the tax rate may be 0%, 10% or 15%.

  • What if I don’t declare my cryptocurrency to the ATO?

    If you’ve made investment gains on cryptocurrency and don’t declare them to the ATO, then that’s probably tax evasion. We appreciate some don’t want to pay tax, but be warned tax evasion can have severe consequences. The ATO are well aware people have made gains on cryptocurrency and they utilise multiple data matching sources to identify tax evaders. Remember, the blockchain is a publicly available record and it’s likely only a matter of time before the ATO has the capability to match you against those blockchain records.

    If the ATO suspect you have not declared gains, then they have the power to issue you with a default tax assessment. You do not want this to happen!

    Once the ATO have issued a default assessment, you must not only prove the ATO have got it wrong, you must also prove what is correct. So, in any case, you’ll be liable for unpaid tax plus penalties plus interest – this won’t be cheap. Therefore, it’s our advice to you, play it smart by talking to us early so we can get you the best possible tax outcome legally.

How Munro’s Cryptocurrency Accountants can help

We have experience with cryptocurrency since 2012 and have consulted with hundreds of Australians on cryptocurrency and tax. Our number one piece of advice is to speak with us as soon as possible, ideally before you start, as getting the right structure in place can help save you a lot of tax. Our number two piece of advice is to start good record keeping early, to avoid the mess at the end. If you’ve already invested, that doesn’t necessarily mean you have no options and we do our utmost to reduce your tax bill as much as legally possible.

What are you waiting for? Reach out to us and let us, help you, pay less tax.