Tax & ATO News Australia

Exchange rate gains and losses

With the rise of (and falls in) digital currencies, such as Bitcoin, regulators, including the ATO, have announced they’ve turned on the spotlight.

Assuming the ATO treats Bitcoin, and other digital currencies, similarly as other foreign currency, the application of the Division 775 foreign exchange gains and losses rules in the Income Tax Assessment Act 1997 could mean substantial increases in income or available deductions resulting from the trade of highly volatile digital currencies.

In short, foreign exchange gains or losses resulting from change in value of a currency (“forex realisation gain” and “forex realisation loss”) are treated as assessable income or deductible.

A simple example of a forex realisation gain is where you dispose of a foreign currency for more than what you paid for it attributable to an increase in the value of the currency.

However, where the gain or loss resulting from the fluctuation in the currency value is not realised, there will be no forex realisation gain or forex realisation loss.

For example, on disposal of a foreign capital asset, on translation into Australian dollars, a capital gain or loss may arise. That capital gain or loss is worked out using the exchange rate at the time of acquisition for the purposes of calculating the cost base, and the exchange rate at the time of disposal for the purposes of calculating the capital proceeds. To work out the effect the exchange rate had on the capital gain or loss, use only the exchange rate at the time of disposal to work out the gain or loss.

The difference is the amount to be included as income or that is available as a deduction, unless it does not contribute to the realised gain or loss.

For example, if, on the disposal you make a capital gain attributable to the increase in value of the asset, but actually make a loss because the foreign currency has dropped in value, the ATO will not allow that net loss as a deduction.

There is also a rule that if 12 months have not passed since acquiring an asset and the disposal of it, including the due date for payment, a forex realisation gain or forex realisation loss will not be treated as assessable or deductible, but rather will be treated as a capital gain or loss. An election can be made out of this 12 month exception.

Posted in: Tax & ATO News Australia at 26 February 14