Cryptocurrency is virtual or digital money that takes the form of tokens or “coins.” Transactions are generally carried out virtually independently of a central bank, central authority or government. Cryptocurrencies such as Bitcoin can be used to purchase goods in the real world.
As cryptocurrencies are becoming more mainstream, governments around the world are now monitoring the movement of this virtual money across borders and are imposing regulations.
In March 2020 the Australian Taxation Office (ATO) introduced new cryptocurrency regulations. Now anybody involved in acquiring or disposing of cryptocurrency is required to keep records in relation to their cryptocurrency transactions.
Cryptocurrency investors fall into one of two categories: investor or trader. In simple terms, a trader is someone who buys and sells assets as their main form of income. If you are holding an asset with the hope of future gain and have other forms of income the ATO is likely to classify you as an investor, even if you buy and sell regularly.
To determine which classification you fall into, the ATO considers:
- the nature and purpose of your activities
- the repetition, volume and regularity of your activities
- whether you have a business plan and your activities are organised in a business-like way.
If you are in business, the trading stock rules apply, rather than the capital CGT rules. If the disposal of cryptocurrency is part of your business, then:
- the cost of acquiring cryptocurrency held as trading stock is deductible
- profits made are assessable as ordinary income, not as a capital gain.
For investor tax purposes the ATO does not classify cryptocurrency as money. Instead, it is classified as a ‘property’ which is treated as a Capital Gains Tax (CGT) asset. Since most people are investors, the focus of this article is on investors.
Capital Gains Tax
If you acquire cryptocurrency as an investment, you may have to pay tax on any capital gain you make on the disposal of the cryptocurrency.
According to the ATO https://www.ato.gov.au, a CGT event occurs when you dispose of your cryptocurrency. Disposal can occur when you:
- sell or gift cryptocurrency
- trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
- convert cryptocurrency to fiat currency (a currency established by government regulation or law ), such as Australian dollars, or
- use cryptocurrency to obtain goods or services.
If you have different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.
Note, that if a business disposes of a cryptocurrency as part of a business transaction, the profits made on disposal will be assessed as ordinary income and not as a capital gain.
Capital Gains Tax
You will make a capital gain if you receive more from the disposal of the cryptocurrency than it cost you to buy it. Canstar summarises the tax the ATO imposes on cryptocurrency investors:
- Your profit from selling any coins, based on the sale price, minus the cost price and any exchange fees.
- If you have owned the coin for less than 12 months, this amount is applied to your taxable income in your tax return as additional income
- If you have owned the coin for greater than 12 months, it is considered a capital gain and half of the gain is added to your income in your tax return
As an investor, you can claim tax deductions on:
- The cost of acquiring your coins – but only by taking that cost off any gain when you sell
- Interest charges if you borrow money to invest
- Any professional advice for the management of your coins
- Tax advice relating to investing in cryptocurrency
If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You can’t deduct a net capital loss from your other income.
The value of cryptocurrencies is notoriously volatile, but even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.
You must keep records of each cryptocurrency transaction to work out whether you have made a capital gain or loss from each CGT event.
The ATO is very clear about the records they expect you to keep. Keeping good records of cryptocurrency transactions is vital for meeting your tax obligations, regardless of whether you are using cryptocurrency as an investment, for personal use or in business.
You need to keep the following records in relation to your cryptocurrency transactions:
- the date of the transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).
The sorts of records you should keep include:
- receipts of purchase or transfer of cryptocurrency
- exchange records
- records of agent, accountant and legal costs
- digital wallet records and keys
- software costs related to managing your tax affairs
The ATO classifies personal use assets as CGT assets that you keep mainly for personal use or enjoyment.
Cryptocurrency is considered to be a ‘personal use asset’ if it is held for personal use and used like you would use a fiat currency such as Australian dollars. Any capital gains made from personal use assets acquired for less than $10,000 are exempt from CGT. Note that all capital losses made on personal use assets are also disregarded.
As a general rule, the longer an asset is held, the less likely the ATO will classify it as a personal use asset – even if you ultimately use it for personal use. The relevant time for working this out is at the time of disposal.
Cryptocurrency is not a personal use asset if it is kept or used mainly:
- as an investment
- in a profit-making scheme
- in the course of carrying on a business.
Cryptocurrency regulations are quite new in Australia. If you are thinking of investing in cryptocurrency or already hold some and are not sure what to do, please contact your accountant.
Featured image credit: Quantum AI Trading