This is a great question, as crypocurrency is becoming more and more popular in Australia. A lot of people are purchasing and trading cryptocurrency including bitcoin, blockchain, bubbles etc.
And of course, because it is becoming so popular, the ATO are keeping a close eye on cryptocurrencies, and have released a guidance paper on this kind of asset.
In this post, we want to give you a general understanding of cryptocurrency and the tax treatment, but the overall outcome will be absolutely dependant on YOUR situation.
So, let’s just take a quick step back, and explain what is a cryptocurrency is for those not sure?
Instead of a tangible piece of currency you take with you, a cryptocurrency is a digital asset that can be exchanged.
When you use cryptocurrency instead of ‘normal’ currency, the crypto owners don’t have to rely on banks to facilitate the transactions, and can therefore avoid the fees often associated with financial institutions.
There is a LOT of complexity to cryptocurrency, so we will move onto the tax treatment.
The ATO treat cryptocurrency as digital commodity, not money or foreign currency. In plain terms, it is treated as an asset. Therefore when it is purchased, sold or exchanged, it triggers an ‘event’. This could be a revenue event, or a capital gain event, but totally dependant on the circumstances of the transaction.
A couple of common examples:
You are a trader
If you purchase the cryptocurrency as an asset with the intention to earn a profit, any gain you make will be fully taxable. If this is the case, you are essentially carrying on a business. And you could claim deductions against this taxable income.
You are an investor
If you acquire cryptocurrency because you just wanted to invest in the technology hoping one day it will go mainstream and increase in value, then you are classified as an investor. This means you would fall under the capital gains regime. 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, 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.
You are a customer
If you purchase less than $10,000 of cryptocurrency, it could be classified as a personal asset, and therefore any profit on disposal could be tax-free.
Word or warning here, the ATO has very strict guidelines on what is a ‘personal asset’, and it may be hard to fall into this category.
You are a business
If you are mining coins to make a profit, you are running a business and the profit is taxable. As mentioned above though, you can claim deductions against this income as you are running a business.
So, what do we suggest
Keep really good records!
We (or any Accountant) are going to need to know details to make sure the tax treatment is correct.
Be prepared for the ATO to ask questions. With all the hype around cryptocurrencies, be sure the ATO is paying close attention.
Ask for advice if needed. This is a new level of complexity that we haven’t seen before. We are here to help!