It's everyone's favourite time of year.... tax season! Ok... maybe not.
Sarcasm aside, all Australians are aware of this notable period. As Australian citizens and residents we have an obligation to file a tax return with the Australian Tax Office.
The evolving world of cryptocurrencies has created a new grey area in the area of tax. Consequently, cryptocurrency traders need to understand the tax ramifications of investing in digital assets.
Does the ATO have an opinion on the tax treatment of digital currencies?
Yes. The Australian Tax Office (ATO) has weighed-in on the tax treatment of digital currencies. The ATO’s work around this topic is fluid, however they have published initial guidelines that are worth reading. While there is still a lot of grey area, cryptocurrencies are a growing focus of Australian tax authorities.
The information contained here is a summary of the ATO’s views. The tax treatment of your own cryptocurrency activity will ultimately come down to your specific circumstances. Given the evolving communication from the ATO around this issue it is best practice to seek out a tax accountant who can advise on your particular situation.
How does the ATO view cryptocurrency?
The ATO does not view cryptocurrency as physical currency or money. Rather, it is property and an asset for capital gains tax (CGT) purposes. The specific tax treatment will vary depending on the intended purpose for that cryptocurrency at purchase. Therefore, it is important to consider your intentions before you purchase cryptocurrency since it will affect how it will be treated for tax purposes.
If you purchase a cryptocurrency with the intention or purpose of earning a profit, then any gain you make on the purchase will be fully taxable at the time of sale. Trading activity is viewed as by the ATO as “carrying on a business”, which means that you are eligible for tax deductions you incurred in deriving this income. The ATO makes an important distinction between “investors” and “traders” for tax treatment purposes. Read about the different classifications here.
Investing in Cryptocurrency
If you are purchasing cryptocurrency as an investment, without the intention to earn a short-term profit, then the gains or losses would fall under the ATO’s capital gains tax (CGT) regime. Capital gains taxes are paid at the time of disposal, which includes selling, trading or exchanging one cryptocurrency for another or converting your cryptocurrency back into fiat currency, like Australian dollars.
The ATO specifies that if you hold your cryptocurrency investment for a period longer than 12 months than you may be eligible for the CGT discount (50%). If you sell within 12 months you will be taxed 100% of the capital gain. If you make a loss when you dispose of your cryptocurrency this can be offset against other capital gains you made during the financial year.
Using Cryptocurrency as a ‘Personal Use Asset’
Some capital gains or losses that arise from the disposal of cryptocurrency for a personal use asset may be disregarded. The ATO has strict guidelines on what is considered a ‘personal use asset’.
If the cost of your cryptocurrency is less than $10,000 and you are only using them to pay for personal goods or services, they are not included in your assessable income. All capital losses on personal use assets are discarded by the ATO.
How to Keep the ATO Happy
In order to be prepared at tax time, and in the event that you may need to prove your position to the ATO, it is important to keep detailed records of your transaction history as it relates to cryptocurrency activity. This includes dates of transactions, the value of the cryptocurrency in Australian dollars at the time of the transactions and any details pertaining to the purpose of the purchase or sale. Many exchanges have the functionality to let you print via an Excel spreadsheet all your transaction history.
Although the ATO cannot presently track transactions once they are converted to cryptocurrencies, they do have the authority to conduct a review or an audit if they suspect criminal activity. The burden of proof will ultimately fall to you to prove your position to the ATO. This onus makes keeping accurate and detailed records of all cryptocurrency activity extremely important.