Cryptocurrency is taking Australia by storm. Prices are soaring to all time highs and everyone seems to want to get involved in the action. More and more Australians are purchasing crypto-assets and it seems like you can’t go anywhere without someone mentioning bitcoin, blockchains and bubbles.
While Bitcoin is definitely the talk of the town and is getting a lot of attention, not all of this attention is from investors and traders. The ATO is also keeping a close eye on these cryptocurrencies and has released a guidance paper of how the ATO view crypto-assets and the tax consequences in different scenarios.
In this blog post, we are going to touch on a few of the views the ATO has about Crypto-assets.
It is important to remember that while the below information will give you a general understanding of the tax implications in different scenarios, the tax treatment of your cryptocurrency profits will come down to YOUR own individual circumstances. A failure to prepare your tax return correctly could expose you to an overpayment of tax or an ATO audit. Remember it is always best practice to talk to a taxation advisor.
How does the ATO view cryptocurrency?
In the tax guidance released by the ATO, it specifies that cryptocurrencies are not viewed as money or a foreign currency. Instead, they are treated as a digital commodity.
In plain terms, the ATO views cryptocurrencies and tokens as an asset. Like a bar of gold, when this asset is traded, sold or exchanged it triggers an event. Whether this is a capital gains event or a revenue event depends on the circumstances and facts surrounding the transaction.
General Taxation Scenarios
The approach the ATO takes when looking at the tax treatment of an asset sale is to first ascertain the taxpayers’ intention for acquiring the asset.
When buying cryptocurrency….
Were you speculating that the price was going to go up and wanted a piece of the action? Are you a day / swing trader trying to ride the volatility of the market? Is it just an easy way to transfer money overseas or to purchase an item online?
Below we have outlined some of the most common tax treatments of cryptocurrencies in certain situations.
Scenario 1 – Purchasing Cryptocurrency Speculating that the price will rise (Trader)
When you purchase cryptocurrency (Like any other asset) with the purpose and intention to earn a profit, then any profit you do make will generally be fully taxable.
For example, if you purchased 5 TaxCoin for $5 with the expectation that this coin will go up in value, and subsequently you sell OR trade the coin (for fiat or another cryptocurrency) with a value of $100. Then the $95 ($100 value less the $5 cost of the coin) you earned by selling or trading the coin would be 100% assessable for tax purposes.
The ATO’s view is that just like other assets, if you enter a trade or purchase with the underlying intention to carry on a profit-making undertaking or business, then you are then taxed 100% on that profit.
The most common area we see the above scenario applying, is when you acquire a cryptocurrency with the intention of trading or selling in the short to medium term (weeks or months) with the intention to make a gain.
It is also worth noting that if you are trading, you are essentially carrying on a business. This means that you are entitled to any deductions you incurred in deriving your assessable income (internet, subscriptions and fees).
You also need to take into account any cryptocurrency you hold at the end of the year as this would be considered ‘trading stock’.
Scenario 2 – Capital Gains Tax (Investor)
If you acquire bitcoin as a capital asset, without an intention to earn a short-term profit or undertake a profit-making plan or business, then the gains on disposal of the cryptocurrency would fall under the capital gains regime.
For example, lets say you heard about bitcoin from a colleague and decided you liked the idea behind blockchain and wanted to invest in the technology hoping that one day it may get wide mainstream adoption and appreciate in value. When you go to sell the cryptocurrency, it will likely be treated as a capital gains event.
The taxation treatment of this will depend on your own personal circumstances (i.e. if you have any capital losses and the amount of time you owned the cryptocurrency).
Generally speaking if you held the cryptocurrency for over 12 months in your wallet (or on an exchange – as long as no trades occurred), then you will qualify for the 50% capital gains concession.
If you sell within 12 months, you will be taxed on 100% of the capital gain.
Scenario 3 – The cryptocurrency is treated as a ‘personal use asset’ (Customer)
We get the question “If I purchase or use less than $10,000 of cryptocurrency, doesn’t that mean it isn’t taxable”. The answer is it depends…
If you purchase a cryptocurrency as a personal use asset, then any profit on the disposal (or deemed disposal) of the asset is tax free.
However, the ATO has very strict guidelines for what is considered a ‘personal use asset’ and it is beyond the scope of this post. It would be very hard in most cases to argue that a cryptocurrency is a personal use asset, and all facts of each scenario would need to be factored into any advice.
The most common example of applying the personal use asset exemption would be where you use bitcoin to purchase goods or services for personal use or consumption. However, if the bitcoin you used were obtained for any of the reasons in the above scenarios, it is likely that the purchase of these goods would not fall under the ‘personal use asset’ exemption and would trigger a profit taking or capital event.
Scenario 4 – Mining Cryptocurrency (Business)
The ATO views mining cryptocurrency for profit as a business. What this means is that any income you derive from mining from transferring the ‘mined coins’ to a third party would be assessable income for tax purposes.
However, as mining is considered a business, you are also allowed to claim any deductions you incurred in deriving the mining income. These expenses could include and are not limited to claiming a deduction for the mining equipment, power, internet and any fees charged for exchanging the coins.
What are some ‘Tax Best Practices’ for Cryptocurrency
Firstly, when it comes to preparing your tax return at the end of a financial year, it is important to have all the information available to you. Whether you are going to be preparing your own tax return or you are going to use a taxation adviser, it is important to plan ahead and record all information you are going to need.
This means having access to all cryptocurrency transactions (purchases, trades and sales). When you are recording these, make sure to record the date, the amount of the transaction in AUD (even if trading from one cryptoasset to another)
Many exchanges have functions that will provide this function and allow you to print all transactions to an excel document.
Secondly, don’t assume the ATO is going to turn a blind eye to cryptocurrency. With all the money and hype in the cryptocurrency market at the moment, you can be sure the ATO is paying close attention.
Finally, ask for advice when needed. The tax landscape is confusing at the best of times, especially when throwing a completely new concept like cryptocurrency in the mix. If you are unsure at any point about your tax obligations make sure to talk to a tax accountant.
The cryptocurrency market is a very exciting and fast-paced environment. While tax is probably the last thing you want to be thinking about, it is important to recognise your responsibilities and plan ahead accordingly.
We at Godbee Favero Strategic Accountants pride ourselves as boutique tax specialists in the cryptocurrency space.
While we are based on the Gold Coast, we are capable of assisting you with tax compliance and planning no matter where in the country you are.
If you are interested in learning more or have any questions please complete your details here.