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“Common Questions & What You Need to Know”
In November 2020 Bitcoin experienced a steady rise to reach new all-time highs, breaking through $20,000 per BTC. Whilst it was not always so steady, cryptocurrencies like Bitcoin and Ethereum have indeed proven resilient. With this in mind Investor interest, both retail and institutional, in digital currencies has risen dramatically in over the past 6 months.
With many new young adult investors entering the investment market to get try their hand at a slice of the pie, there are many things that need to be taken into consideration, in particular the tax treatment of these transactions. Set out below is some answers to the most commonly raised questions we receive surrounding the taxation aspects of crypto trading.
What taxes are applicable to crypto transactions?
Capital Gains Tax (Capital Income)
A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. CGT is the tax you pay on the difference between the Australian Dollar (AUD) value of the disposed asset at the time of the disposition minus the
AUD value of the disposed asset at the time it was acquired.
A disposal can occur when you:
sell or gift cryptocurrency
trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
convert cryptocurrency to currency such as Australian dollars, or
use cryptocurrency to obtain goods or services.
Important Note - While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.
If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. However certain capital gains or losses less than $10,000 from disposing of a cryptocurrency that is a personal use asset are disregarded. Where the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.
Example 1 Howard has been a long-term investor in shares and has a range of holdings in various public companies in a balanced portfolio of high and low risk investments. Some of his holdings are income producing and some are not. He adjusts his portfolio frequently at the advice of his adviser. Recently, Howard's adviser told him that he should invest in cryptocurrency. On that advice, Howard purchased a number of different cryptocurrencies which he has added to his portfolio. Howard doesn't know much about cryptocurrency but, as with all of his investments, he adjusts his portfolio from time to time in accordance with appropriate investment weightings. If Howard sells some of his cryptocurrency, the proceeds would be subject to CGT because he has acquired and held his cryptocurrency as an investment.
Example 2 John made an investment in Bitcoin on 7th December, 2018 purchasing 11 Coins for $50,000. On 2nd April, 2021 John’s Bitcoin investment had increased in value and he sold his 11 coins for $800,000. John also had taxable income from other sources for the 2021FY totalling $97,633. John’s cost base was $50,000, you take this away from $800,000 for a capital gain of $750,000. As John held the Bitcoin for more than 12 months, he can apply a CGT discount of 50% = $375,000 net capital gain. John then adds his net capital gain to the rest of his taxable income of $97,663. $375,000 + $97,663 = $472,663. Apply tax at the relevant marginal rate. If you earn more than $180,000 for the year, you pay $51,667 in tax + 45c for each dollar over $180,000 = $183,365 tax payable.
Income Tax (Ordinary Income)
If you hold cryptocurrency for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.
Examples of businesses that involve cryptocurrency include:
cryptocurrency trading businesses
cryptocurrency mining businesses
cryptocurrency exchange businesses (including ATMs).
Not all people acquiring and disposing of cryptocurrency will be carrying on businesses. To be carrying on business, you will usually:
carry on your activity for commercial reasons and in a commercially viable way
undertake activities in a business-like manner – this would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan
prepare accounting records and market a business name or product
intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term.
There is also usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.
Whether you are carrying on a business and when the business commences are important pieces of information. If you’re still setting up or preparing to go into business, you might not yet have started the business.
Money received (or property received) prior to a business being carried on is not generally assessable income. Likewise, you can't claim deductions incurred prior to the business being carried on.
Example 1 Stephen is in the business of trading cryptocurrency. On 15 December 2017, he purchases 1,200 Coin A for $190,000. On the same day, he sells 500 Coin A for $260,000. As Stephen holds the cryptocurrency for sale or exchange in the ordinary course of his business, Stephen can claim a deduction for $190,000 for the acquisition for Coin A and declares income of $260,000 for the later sale of Coin A.
Goods & Services Tax
Cryptocurrencies are exempt from goods and service tax (GST) effective July 1, 2017.
Is my trading personal use?
Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption.
Cryptocurrency is not a personal use asset if it is kept or used mainly:
as an investment; or
in a profit-making scheme; or
in the course of carrying on a business.
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. However, where the cryptocurrency is acquired and held for some time before any such transactions are made, or only a small proportion of the cryptocurrency acquired is used to make such transactions, it is less likely that the cryptocurrency is a personal use asset.
In most circumstances, the cryptocurrency will not be a personal use asset. However, there are some exceptional circumstances:-
when you 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). i.e PayPal, Stripe, Secure Pay, Square etc.
The relevant time for working out if an asset is a personal use asset is at the time of its disposal. During a period of ownership, the way that cryptocurrency is kept or used may change (for example, cryptocurrency may originally be acquired for personal use and enjoyment, but ultimately kept or used as an investment, to make a profit on ultimate disposal or as part of carrying on a business). The longer a cryptocurrency is held, the less likely it is that it will be a personal use asset – even if you ultimately use it to purchase items for personal use or consumption.
Example 1 Elliot wants to attend a concert. The concert provider offers discounted ticket prices for payments made in cryptocurrency. Elliot pays $270 to acquire cryptocurrency and uses the cryptocurrency to pay for the tickets on the same day. Under the circumstances in which Elliot acquired and used the cryptocurrency, the cryptocurrency is a personal use asset.
Example 2 Adam has been regularly keeping cryptocurrency for over six months with the intention of selling at a favourable exchange rate. However, after a surge in prices, he has decided to buy a new Tesla electric car directly with some of his cryptocurrency. Because Adam used the cryptocurrency as an investment, the cryptocurrency is not a personal use asset.
Example 3 Jessica pays $50 to acquire cryptocurrency each fortnight. During each of the same fortnights, she uses the cryptocurrency to enter directly into transactions to acquire designer clothing pieces. Jessica does not hold any other cryptocurrency. In one fortnight, Jessica identifies a custom dress that she wishes to acquire from an online retailer that does not accept the cryptocurrency. Jessica uses an online payment gateway to acquire the dress. Under the circumstances in which Jessica acquired and used the cryptocurrency, the cryptocurrency (including the amount used through the online payment gateway) is a personal use asset.
How does the Australian Taxation Office (ATO) know you owe crypto taxes?
The ATO estimates that there are between 500,000 to 1,000,000 Australians that own cryptocurrency. In late 2019 the ATO started collecting records from Australian cryptocurrency designated service providers (DSPs) on an ongoing basis to ensure people were being tax compliant. DSPs include (but not limited to) brokerage services, payment facilitators, cryptocurrency exchanges, and bitcoin ATM providers.
The ATO aims to collect some or part of the data points listed below from 2014 onward. The types of information included in these records include:-
Digital Currency Owner Details
Name
Address
Australian Business Number
Date of birth
Phone numbers (fixed-line and mobile)
Email address
Social media accounts (Facebook, Twitter, Instagram, etc.)
Account and Transaction Details
Account and transaction details
Status of account (open, closed, suspended, lost, etc.)
Linked bank accounts
Wallet address associated with the account
Lost or stolen (crypto)currency amounts linked to accounts
Unique identifier
Transaction date
Transaction time
Type of (crypto)currency
Amount (in fiat and cryptocurrency)
Type of transfer
Transfer description
Total account balance
This means that every time you make any cryptocurrency transactions there is an electronic record that is being reported to the ATO by the DSP. When you lodge your tax return, the ATO system tries to match what you reported vs what has been reported to the ATO by the DSP. This matching system is in place to make sure taxpayers are disclosing cryptocurrency activity accurately and paying the right amount of taxes.
On March 11, 2020, it was reported that the Australian Taxation Office (ATO) had started sending tax notices to 350,000 Australians who had cryptocurrency transactions.
Usually, for cost-benefit reasons, tax authorities focus on taxpayers with large amounts of omitted or underreported taxes. However, currently in Australia, the ATO seems to be cracking down on taxpayers with even small amounts of crypto transactions given the automated processes they have in place for generating tax letters and scanning for underreported transactions.
This underscores the importance of accurate & complete cryptocurrency tax reporting and that no one is immune from the ATO oversight.
It is important not to assume that transactions made with bitcoin and other cryptocurrencies are untraceable – they’re not. And don’t even think about “forgetting” to disclose the details of your crypto transactions, as mentioned above the ATO is targeting digital currencies this year and the penalties for non-disclosure are severe.
How do you minimise cryptocurrency taxes?
Sell long-term crypto assets for a discount
The ATO allows you to reduce your capital gains by 50% (33.33% for complying super funds and eligible life insurance companies) when you sell cryptocurrencies which you held for more than 12 months.
Important Note - 50% discount is removed or reduced on capital gains made after 8 May 2012 for foreign resident individuals
Personal use assets
Although there are no set conditions for you to prove your personal use case for cryptocurrencies you hold, the following are some good practices to follow to make a compelling case for personal consumption:-
Have separate wallets for personal use cryptocurrency and investment cryptocurrency.
Transact more frequently from your personal use wallet to avoid being a holder/investor (the longer a cryptocurrency is held, the less likely it is that it will be a personal use asset – even if you ultimately use it to purchase items for personal use or consumption).
Keep detailed receipts and records of everything you purchase with your personal use cryptocurrency.
Do not exchange cryptocurrency to currency to then buy products and services. This would disqualify it as a personal use asset.
Purchase products or services for personal consumption directly from the vendor without using a payment gateway or other bill payment intermediary.
Deductions
Think about deductions. Are you eligible to claim any deductions for expenses related to your crypto transactions, such as if you run a bitcoin mining business, legal or investment advice fees and crypto tax software fees.
What do I need to prepare for my accountant?
Regardless of whether you’re considering your individual or business tax obligations, it’s essential that you keep detailed records of your cryptocurrency transactions. These should include:
The date of each transaction
The value of the cryptocurrency in Australian dollars at the time of the transaction (you can get this from a reputable crypto exchange)
The purpose of the transaction
The details of the other party involved (even if it’s just their crypto wallet address)
For example, if you want to claim the personal use exemption, you’ll need to be able to prove that you used your cryptocurrency to buy an item or service for personal use.
Examples of records you should keep include:
Receipts of cryptocurrency purchases or transfers
Exchange records
Records of agent, accountant and legal costs
Digital wallet records and keys
Software costs associated with the management of your tax affairs
Cryptocurrency Tax Reporting Software
Cryptocurrency tax software is built to automate the entire crypto tax reporting process. Investors and traders from all over the world use these platforms to create their necessary capital gains and losses tax reports for their home country.
Simply connect your cryptocurrency exchanges and import your historical trades directly into your account with the click of a button. The platform will handle all of the number crunching in the background and export your capital gains, losses, and income reports based on your imported data. You can then give these tax reports to your accountant or tax professional.
Whilst we have set out the basics above there are a raft of other taxation treatments to consider when it comes to trading in cryptocurrencies, including transactions such as exchanging one coin type for another, staking rewards, air drops, loss or theft, chain splits etc.
Whether you are currently investing and have more questions relating to your crypto trading or new to the game and looking to gain a better understanding of the tax consequences, please don’t hesitate to contact us.
Author: Billy-Jo Famlonga
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