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 (or should we call them speculators?) have been drawn into the net of this latest monetary craze.
One thing to bear in mind if you’re considering getting into crypto-currencies, or are already involved, is that there are tax implications to trading and investing in these new digital products. Here’s our guide to tax and cryptocurrency.
Is the ATO focusing on cryptocurrency?
The ATO estimates that between 500,000 to one million Australians that have dabbled in crypto-assets and that many of them have failed, or will fail, to properly report the profits they have made for tax purposes.
As a result, the ATO is forcing Australian cryptocurrency designated service providers (DSPs) to hand over data on Australian customers that will help the ATO identify taxpayers who fail to disclose their income details correctly.
If your name is ‘on the list’, expect the ATO to send you a ‘please explain’ letter if your tax return hasn’t disclosed your crypto transactions!
How are cryptocurrencies taxed?
Investing in cryptocurrency
If you buy cryptocurrency as an investment, Capital Gains Tax (CGT) will apply. This is calculated based on the difference between the amount you paid for the cryptocurrency and the amount you sold it for. Any profit is subject to CGT, which can potentially be discounted by 50% if you hold your crypto asset for more than 12 months.
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 only applies where the cost of the cryptocurrency does not exceed $10,000 and you can demonstrate that the cryptocurrency was to fund genuine personal consumption, such as paying for a holiday, a car, etc. Mistakenly relying on this exemption is one of the biggest reasons people fall foul of the ATO; expect to be asked to provide proof that you either did – or intended to – use your cryptocurrency to fund personal spending on goods and services.
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.
If you buy and sell cryptocurrency on a regular basis with a view to making a profit, then the profits on disposal of the cryptocurrency will not be subject to CGT but will be assessable income since you will be regarded as a trader rather than an investor. In effect, you’ll be regarded as being in business as a buyer/seller of cryptocurrency.
Note: the rules around trading cryptocurrency for business or profit versus buying and selling cryptocurrency as an investment are essentially the same as those applying to share traders versus investors. There are other factors to take into account but broadly, if you are holding the cryptocurrency with a view to long term gain, you are likely to be an investor and if you are buying and selling cryptocurrency over the short term with a view to making profits, you are likely to be a trader.
Where you are in the business of mining cryptocurrency, any income that is derived from the transfer of the mined currency to someone else is included in assessable income.
Any expenses you incur in respect of the mining activity are allowed as a deduction.
If you are dealing with cryptocurrency, make sure you keep records to prove your transactions. The ATO may ask to see them, including:
- the date of each transaction
- the amount in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for, and
- details of the other party
If you’re not sure of how your crypto transactions should be treated, make sure you talk to a tax agent or accountant, who will be able to give you advice specific to your situation. To find out more talk to one our tax consultants. Use our office locator and find your nearest H&R Block office or call 13 23 25.
By Mark Chapman, Director of Tax Communications at H&R Block