Soaring prices and the promise of increased wealth have resulted in more and more people wanting a slice of the much hyped cryptocurrency pie. Australians, more than ever before, have bought into crypto-assets, and this trend is expected to continue.
While Bitcoin and other cryptocurrencies have grabbed the attention of traders and investors, the Australian Taxation Office is also keeping a watchful eye on them. The ATO has created a guidance paper covering taxation policies of crypto-assets in Australia.
While this information offers a general understanding of taxation in different situations, the way cryptocurrency assets are taxed will depend entirely on individual circumstances. Any person purchasing or dealing with cryptocurrency is responsible for filing accurate tax returns, or may risk an ATO audit. A professional tax consultant can help you best assess your situation to avoid any penalties.
The ATO’s Outlook of Cryptocurrency
In the ATO’s guidance paper, it specifically mentions that cryptocurrencies are considered digital commodities or assets and not physical currency. Similar to a gold bar, trading, selling or exchanging this asset results in an event. This may be regarded as a capital gains or revenue event and will depend on the transaction situation.
Situations For Taxation Of Cryptocurrency
The ATO looks at the intention of the buyer acquiring an asset before determining how it should be treated from a tax perspective. When buying cryptocurrency, the ATO considers the following:
- Did the buyer speculate about pricing and want to profit from a higher price?
- Did the buyer engage in day trading to exploit market volatility?
- Is the buyer looking to transfer money overseas more easily?
- Does the buyer want to purchase an item online?
- Did the buyer receive payment for goods and services provided?
Here are some situations for cryptocurrency taxation:
Situation 1 – Purchasing Cryptocurrency With The Expectation Of A Price Rise
If you purchase cryptocurrency with the intention of earning a profit from a price rise, then your profit is considered to be fully taxable.
t’s take an example. You purchased 2 TaxCoin for $2 and expect this to rise in value. You then sell or trade this coin for the same or another cryptocurrency valued at $100. You would have earned $98 from the transaction. This entire profit of $98 would be considered income for tax purposes. According to the ATO, if you trade cryptocurrency like any other asset with the intention of earning a profit, then you will be taxed entirely on any profit you earn.
In the above scenario, you have acquired cryptocurrency to trade or sell in the short or medium term, and your intention is to earn a profit. When you trade, you are effectively conducting a business, which means you are eligible to claim any deductions in acquiring your assessable income. This may include subscriptions, Internet costs and other fees. You will also need to consider all cryptocurrencies you hold at the end of the financial year, which is known as trading stock.
Situation 2 – Purchasing Cryptocurrency As A Capital Asset
If you acquire cryptocurrency as a capital asset without attempting to earn profit in the short or medium term, then this falls under capital gains.
Let’s take an example. You’ve decided to invest in Bitcoin for the long-term in the hope that it is adopted into the mainstream world, which causes it to appreciate in value. When you sell, it will be considered a capital gains event. Taxation, in this instance, will depend on your own personal situation; especially if you have incurred capital losses during the time you owned this cryptocurrency.
If you’ve held cryptocurrency for over 12 months without any trading, then you may be eligible for a capital gains concession of 50%. If you sell in less than 12 months, you are taxed 100% of the profit.
Situation 3 – Purchasing Cryptocurrency As A Personal Asset
If you buy cryptocurrency for your personal use, then the profit you gain by disposing it is generally considered tax and GST free – provided the cryptocurrency cost is under $10,000. But the ATO has strict guidelines on what is considered a personal use asset, and it may be difficult to convince them that cryptocurrency has been bought for personal use.
Most commonly, the application of cryptocurrency as a personal use asset is when you utilise it to purchase goods and services for your own consumption. In any other circumstance, it may likely be deemed as a profiteering or capital gains event.
Situation 4 – Purchasing Cryptocurrency For Mining
If you purchase cryptocurrency for mining, the ATO views it as a business where you’re looking to earn a profit. This means that any income gained from mining cryptocurrency would be regarded as taxable income.
But since mining is viewed as a business, you may be eligible to claim deductions incurred in acquiring this income. This may include Internet charges, electricity and fees paid for exchanging cryptocurrency.
Situation 5 – Receiving Cryptocurrency For Goods And Services
If you receive cryptocurrency for the goods and services provided by your business, you need to record this amount in Australian dollars as part of your income. The Australian dollar value is the fair market value, which can be acquired from a cryptocurrency exchange. You may be charged GST for the cryptocurrency and will be eligible to claim input tax credits.
Best Taxation Practices For Cryptocurrency
Cryptocurrency can be complex when it comes to taxation, so it’s important to follow these best practices:
Record And Make Accessible All Cryptocurrency Transaction Information
At the end of a financial year, you must have all information recorded and readily available when preparing your tax returns – whether you prepare them on your own or use the services of a professional tax advisor. This means that all cryptocurrency transactions must be properly recorded, including date, amount, currency and type of transaction. Most cryptocurrency exchanges allow you to record and print all your transactions.
Lodge Accurate Cryptocurrency Returns
It’s easy to assume that the ATO will overlook cryptocurrency transactions, but this could get you in trouble. With the amount of transactions around cryptocurrency today, the ATO is monitoring it more closely than ever before. Avoid any tax issues by lodging accurate cryptocurrency returns.
Seek Professional Advice
Cryptocurrency is relatively new and complex, so it can be confusing when it comes to filing your tax returns. A professional tax consultant is in a better.