More and more people are exploring the world of cryptocurrency, whether it be to trade, invest or use as a different form of payment for goods and services. What is often forgotten and/or misunderstood when it comes to cryptocurrency are the tax implications associated with this activity. This article provides a general outline of how the Australian Taxation Office (ATO) are treating certain cryptocurrency activities.
What is cryptocurrency?
Cryptocurrency (or crypto for short) is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptography is the study and practice of sending secure, encrypted messages between two or more parties which enables digital currency transactions to be pseudonymous, secure and trustless, meaning no bank or other intermediary is required. The ‘crypto’ in the word ‘cryptocurrency’ means secret in Greek.
Cryptocurrency does not have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. The value of crypto is determined, not by an exchange – like shares are on the ASX for example, but by the amount a trader is willing to pay for it. The most well-known cryptocurrency is Bitcoin.
How is cryptocurrency taxed?
Firstly, it is important to understand that the ATO does not view cryptocurrency as money. Their current view is that cryptocurrency is a form of property and is therefore treated as a CGT asset for tax purposes, with the capital gains tax provisions being applied to determine the taxation implications.
The capital gains tax provisions operate to tax the ‘gain’ you realise on the sale of an asset. Your capital gain is quantified by taking the cost base of your asset from the capital proceeds you received from the sale. This difference is your capital gain and is subject to tax at your marginal tax rate.
For example, if you purchase an apartment for $200,000 and later sell it for $300,000, your capital gain will be $100,000.
If you make a loss on the sale, this loss can be used to offset other capital gains but cannot be deducted from your ordinary income.
In the world of cryptocurrency, many different transactions involve the ‘disposal’ of crypto. These disposals may give rise to capital gains tax events, resulting in gains being realised and tax being payable on these gains.
Notably, the taxation treatment under the CGT provisions will be different for taxpayers based on whether they are an investor or a trader.
It is generally accepted that most taxpayers will fall under the investor category when it comes to cryptocurrency activity. This will be the case even if you regularly trade in cryptocurrency where your dealings are predominately for personal investment and result in long-term gains.
A trader is taxed differently to an investor with any gains or losses made on cryptocurrency activity being subject to income tax and not capital gains. To be classified as a trader you need to demonstrate that you are carrying on your trading activities to a degree that would be considered carrying on a business for income tax purposes. Things to support this would include the nature and purpose of the activities being undertaken, the repetition, volume and regularity of the activities and whether a business plan exists and/or the activities are organised in a business-like way.
We recommend that you seek guidance regarding your classification as an investor versus a trader as various factors may influence this result and the subsequent tax treatment of your activities.
When is cryptocurrency taxed?
You are required to assess any capital gains or profits you realise each time you trade, sell or gift crypto assets or have any other disposal type event. We have provided some examples below of the common events that may attract tax implications.
Crypto and crypto transactions
The ATO view each type of cryptocurrency as a separate asset. Exchanging one cryptocurrency for another (eg. Bitcoin for Ethereum) will result in a CGT event, requiring you to quantify any gain or loss made on the transaction and being assessed accordingly.
In order to determine your capital gain or loss the ATO require you to convert your transaction to Australian dollars. If the cryptocurrency you receive cannot be valued, the capital proceeds from the disposal are worked out using the market value of the cryptocurrency you disposed of at the time of the transaction.
You purchase 100 units of Bitcoin for a total of $10,000. A week later you exchange 10 of Bitcoin for 20 of Ethereum. At the time of exchange, 20 of Ethereum is worth $2,000.
The capital gain on this transaction can be calculated with a cost base as $1,000 (purchase price of 10 units of Bitcoin) and the capital proceeds as $2,000 (market value of Ethereum at the time of exchange).
The capital gain is $1,000 ($2,000 – $1,000).
The taxpayer in this case would be taxed on the $1,000 gain at their marginal tax rate.
It should be noted that if the gain related to this transaction took place after the Bitcoin had been held for greater than 12 months then it may be possible for the gain to be discounted by 50% under the CGT discount provision.
This example is referenced from Crypto Tax Calculator.
Converting to a fiat currency
A common way to realise your investment in cryptocurrency is to exchange it for a fiat currency (eg. AUD, Euro, USD etc.). This is considered a CGT event and tax will be assessed on any capital gains realised at the time of the conversion.
You will make a capital gain where the proceeds from disposal of the cryptocurrency is more than its cost base. If you hold the investment for more than 12 months then only 50% of the gain is taxable under the CGT discount. You will make a capital loss if the proceeds from disposal are less than the cost base. Capital losses realised can be offset against other gains in the same income year or carried forward to be used in future years.
It should be noted that this treatment is based on the taxpayer being an investor, having acquired the cryptocurrency for investment purposes.
If a trader realises profits on exchanging cryptocurrency for a fiat currency then the profit realised will be assessed at marginal tax rates. Any losses made in this instance are treated as income losses and can be offset against other profits/income generated by the taxpayer.
Personal Use Asset
A personal use exemption is available where assets are acquired for less than $10,000 and the asset is kept mainly for personal use and enjoyment. If the exemption applies, any gain or loss made from the CGT event is disregarded for tax purposes.
The ATO are of the view that most cryptocurrency is used to earn a profit, either through income or through capital growth and as such, it is unlikely that the personal use exemption will apply on cryptocurrency CGT events.
Factors the ATO will consider in determining whether cryptocurrency is a personal use asset include the length of time the asset is held (the longer the holding the less likely it is a personal use asset), how it is used and the purpose for holding it.
We recommend you seek guidance before considering application of this exemption.
Proceeds from Staking
Staking offers crypto holders a way of putting their cryptocurrency to work earning passive income without a need to sell them. It is the crypto equivalent of putting money into a term deposit or high-yield savings account.
The ATO are of the view that income earned from staking rewards will not constitute a CGT event but they will be treated as income, the same way interest is treated as income if received from a savings account or term deposit.
A chain split refers to the situation where there are two or more competing versions of a blockchain. These competing versions share the same history up to the point where their core rules diverge.
If you receive new cryptocurrency as a result of a chain split, you do not derive ordinary income or make a capital gain at the time the new cryptocurrency is received.
If you hold the cryptocurrency as an investment then you will make a capital gain or loss at the time you dispose of the asset. In working out your capital gain, the cost base of the cryptocurrency you received as a result of the chain split is zero.
Working out which cryptocurrency is the new asset received as a result of the chain split requires an examination of the rights and relationships existing in each cryptocurrency you hold following the chain split. If one has the same rights and relationships as the original cryptocurrency then this cryptocurrency will be the continuation of the original asset.
Lost or Stolen Cryptocurrency
It may be possible for you to claim a capital loss if you have lost your cryptocurrency private key or it has been stolen.
In order to claim a loss you need to have the ability to establish that the cryptocurrency has legitimately been lost. Generally, where an item can be replaced it is not lost. A private key can’t be replaced and therefore, to claim a capital loss you must be able to provide the following kinds of evidence to the ATO:
- When you acquired and lost the private key;
- The wallet address that the private key relates to;
- The cost you incurred to acquire the lost or stolen cryptocurrency;
- The amount of the cryptocurrency in the wallet at the time of loss or the private key;
- That the wallet was controlled by you;
- That you are in possession of the hardware that stores the wallet; or
- Transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity.
It is imperative that you keep records of your cryptocurrency transactions in order to disclose your relevant activity each financial year.
The ATO require you to keep the following records in relation to your transactions:
- The date of transactions
- The value of the cryptocurrency in Australian dollars at the time of the transaction
- What the transaction was for and who the other party was (even if its 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
Given the potential for a high level of transactions to maintain and quantify, we recommend you consider using a third-party software provider to compile your data.
We use Crypto Tax Calculator, an Australian built platform that provides extensive collation and analysis of data that complies with the Australian taxation legislation. Subject to the level of cryptocurrency activity you have, a calculator such as this one is likely to be beneficial in helping you assess your tax liability as well as achieve some of your record keeping requirements.
We can help
We have specialists on hand that can assist you in navigating the complexities associated with the taxation of cryptocurrency activity. Contact us on 03 5221 6399 or at firstname.lastname@example.org to discuss how we can help you.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.