Recently the Australian Tax Office (ATO) has announced that it has been cracking down on the profits made from cryptocurrency investing and trading. This along with the growth in popularity of Bitcoin and other cryptocurrencies as an investment choice mean we need to consider the tax impact of trading and investing in these products.
In the ATO's view, cryptocurrency transaction are subject to both income and capital gains taxes in Australia. So, with that in mind let us take a look at some of the main things we need to consider:
Transacting with Cryptocurrency
In the ATO's view a digital currency is an asset and therefore a capital gains tax (CGT) event occurs when you dispose of cryptocurrency. A disposal occurs when you:
- Sell or gift cryptocurrency
- Trade or exchange cryptocurrency
- Convert cryptocurrency to fiat currency, such as Australian or US dollars
- Use cryptocurrency to obtain good and services
If you make a gain on the disposal of cryptocurrency, some or all of that gain will be taxed. However, there are a few transactions which are exempt from capital gains tax which we will discuss in further detail below.
Businesses received payment for goods and services by cryptocurrency
If you are a business and you receive payment in the form of cryptocurrency for good and services you provide, you will need to record the value of cryptocurrency in Australian dollars as part of your ordinary income. The value in Australian dollars will be the market value of the cryptocurrency on the day the transaction was made and can be obtained from a reputable cryptocurrency exchange.
Where you purchase business items using cryptocurrency (including trading stock) you are entitled to a tax deduction based on the market value of the item acquired, however there may be capital gains tax consequences when you dispose of cryptocurrency for business purposes.
Personal use exemption
Personal use assets are exempt from CGT if they cost less than $10,000. The ATO will accept that cryptocurrency is a personal use asset if you hold less than $10,000 worth and it is used predominantly to purchase goods and services. Meaning your intention for holding cryptocurrency is not to derive a profit.
Cryptocurrency acquired as an investment
If you acquire cryptocurrency as an investment, the rules are essentially the same as the rules that are applied against share traders or share investors. Generally speaking, if you purchase cryptocurrency to hold with the view for long term gains, you will be considered an investor. If that is the case you will make a capital gain when you sell your cryptocurrency for more than you purchased it for, and a capital losses if you sell it for less than the purchase cost. Any capital gains will also be subject to the 50% CGT discount if you are an Australian resident and have held the cryptocurrency for over 12 months.
However, the ATO may consider you to be a cryptocurrency trader if the purpose of your investment is to buy and sell cryptocurrencies for short term gains, rather than long term growth. In this case any gains would be taxed as assessable income and the 50% CGT discount would not apply.
Trading one cryptocurrency to another cryptocurrency
Trading one cryptocurrency for another cryptocurrency would also be considered a taxable event. In the ATO's view this would be considered as two separate transactions. The first transaction being the sale of the first cryptocurrency and the second transaction would be buying the other cryptocurrency. Even through you don't receive any cash in hand, you will still need to pay tax on any gain made on the disposal of the first cryptocurrency.
If you have acquired cryptocurrency through "mining" the ATO could consider you to be in the business of mining. In which case any proceeds you receive from mining activities would be treated as assessable income. Likewise, any expenses incurred during the mining activity will be allowed as a deduction against any income received for the cryptocurrency mining business.
Records to keep
The ATO has advised that anyone dealing in cryptocurrencies should keep the following records of the transactions:
- The date of any acquisitions or disposals of cryptocurrency transactions
- The value of the cryptocurrency in Australian dollars as the time of the transactions (can be taken from a reputable online exchange)
- The identity of the other party (their cryptocurrency address)
- The nature and purpose of the transaction.
If you require assistance or would like further information about taxation on cryptocurrency, talk to your MDL contact who will put you in touch with one of our friends at Hall Chadwick with the skills best suited to you and your business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.