There’s no doubt that the explosive growth of Bitcoin and other similar crypto-currencies has been the financial fad of the last few years. With explosive growth in recent years (and periodic crashes), it’s been possible to make (and lose) substantial sums of money over startlingly short time periods and many inexperienced investors have been drawn into the net of this latest monetary craze.
One thing to bear in mind is that there are tax implications to trading and investing in these new digital products.
Will the ATO find out about Cryptocurrency Dealings?
The ATO estimates between 500,000 to 1,000,000 Australians have dabbled in crypto-assets – and many of them have failed (or will fail) to properly report the profits.
As a result, the ATO requires Australian cryptocurrency designated service providers (DSPs) to hand over data on Australian customers to help them identify taxpayers who fail to disclose their income details correctly.
The ATO matches the data provided against its own records to identify individuals who may not be meeting their registration, reporting, lodgment and/or payment obligations.
If what is disclosed to the ATO on the tax return doesn’t match the data the ATO has received from the DSPs, taxpayers can expect a “please explain” letter, with the possibility of stronger consequences. This makes it difficult to hide behind the anonymity that was previously one of the hallmarks of cryptocurrency.
This page introduces the more popular terms and phrases relevant to cryptocurrencies, providing a foundation for those interested in exploring this innovative asset class.
The following records need to be kept in relation to cryptocurrency transactions:
- the date of the transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction (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)
Other records the taxpayer 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 their tax affairs
Taxpayers need to keep records for five years from the date they lodged their tax return.
Cryptocurrency and Tax Implications
Where a taxpayer buys cryptocurrency as an investment, Capital Gains Tax (CGT) will apply.
This is calculated based on the difference between the amount paid for the cryptocurrency and the amount it is disposed for. Any profit is subject to CGT, which can potentially be discounted by 50% if the crypto asset is held for more than 12 months.
Capital gain is worked out like this:
Disposal occurs when:
- Selling cryptocurrency for Australian dollars
- Exchanging one cryptocurrency for another
- Gifting cryptocurrency
- Trading cryptocurrency
- Using cryptocurrency to pay for goods or services
In some cases (such as when you gift it), market value is substituted for proceeds.
What if Taxpayer makes a Loss
If the sale proceeds are less than the cost base, the taxpayer will make a capital loss. These losses can be offset against capital gains arising in the same year and to the extent they are not used up, they can be carried forward indefinitely until capital gains arise to absorb them. Capital losses can only be offset against capital gains, they can’t be offset against any other form of income.
Tax Implications when Selling Cryptocurrency for currency, Swapping for another Crypto
Whether the taxpayer sells for Australian dollars or exchange one form of cryptocurrency for another, the tax treatment is the same, i.e. taxpayer will be liable for CGT and will need to record any gain on their tax return. The gain is basically the sale proceeds (substituted for market value for some transactions) less the cost.
Exchanging cryptocurrency for another cryptocurrency
- Exchanging coins is actually the disposal of one CGT asset and acquisition of another CGT asset
- The market value of the currency received needs to be accounted for in Australian dollars
- If the currency received cannot be valued, the market value of the coins disposed of will be used
EXAMPLE of exchanging Cryptocurrency
The Personal Use Exemption
Some taxpayers mistakenly think that you can buy up to $10,000 of cryptocurrency and avoid CGT by taking advantage of the ‘personal use exemption’. This is incorrect.
Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption.
It is not a personal use asset if it is kept or used mainly:
- as an investment
- in a profit-making scheme, or
- in the course of carrying on a business.
Both the period of holding and the nature of the subsequent transaction will be relevant to whether the cryptocurrency is a personal use asset.
Where cryptocurrency is acquired and used within a short period of time to acquire items for personal use or consumption, the cryptocurrency is more likely to be a personal use asset. The longer a cryptocurrency is held, the less likely it is that it will be a personal use asset – even if it is ultimately used to purchase items for personal use or consumption.
Except in rare situations, the cryptocurrency will not be a personal use asset:
- when you have to exchange your cryptocurrency to Australian dollars (or to a different cryptocurrency) to purchase items for personal use or consumption, or
- if you have to use a payment gateway or other bill payment intermediary to purchase or acquire the items on your behalf (rather than purchasing or acquiring directly with your cryptocurrency).
As with other personal use assets:
- Capital gains are exempt if the asset cost < $10,000
- Capital losses are disregarded
The relevant time for working out if an asset is a personal use asset is at the time of its disposal.
Remind your clients to keep clear records – it is up to them to demonstrate the intention behind each purchase and transaction.
Where the cost of your cryptocurrency assets exceeds $10,000, the personal use exemption will not be available and CGT will apply, whether the asset was for personal use or not.
CASE STUDY – Tim
Tim is a long-term investor in shares and has a balanced portfolio of high and low risk investments in various public companies. Some of his holdings are income producing and some not, and he adjusts his portfolio frequently at the advice of his adviser.
Recently, Tim’s adviser told him that he should invest in digital currency. On 16 December 2020, he bought one unit of the digital currency for $4,435. By 21 June 2021, the value of his unit had increased to $14,100 and, fearing the price rise was unsustainable, he decided to sell, making a profit of $9,665 (excluding fees).
Prior to purchasing his unit of digital currency, Tim was told by a friend that profits on digital currencies are tax free provided the cost of the investment is $10,000 or less.
Loss or Theft of Cryptocurrency
Taxpayers may be able to claim the value of their capital loss if they lose their coins (cryptocurrency private key), they are stolen or are otherwise subject to fraud.
In this context, the issue is likely to be whether the cryptocurrency is lost, whether the taxpayer has lost evidence of ownership, or whether they have lost access to the cryptocurrency.
- Generally where an item can be replaced it is not lost.
- A lost private key can’t be replaced.