Initial ATO coverage of cryptocurrencies centred on Bitcoin, however their stance applies to the entire cryptocurrency universe. The ATO deems cryptocurrencies as CGT assets, which are defined as:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
Therefore, the disposal of any cryptocurrency would give rise to a CGT event. A capital gain will be made where the proceeds of any sale exceed the cost to acquire the cryptocurrency. Similarly, like most CGT assets, if you have held the cryptocurrency for greater than 12 months, you will be eligible for a 50% discount on the gain.
If the currency is used or kept only for your personal use and enjoyment, the capital gain can be disregarded if the purchase cost is $10,000 or less. Cryptocurrency kept or used primarily to acquire items for personal use or consumption will satisfy the exemption. An example of where cryptocurrency would be considered to be a personal use asset is where an individual purchases cryptocurrency from a cryptocurrency exchange and uses the cryptocurrency to make purchases for their personal needs, such as food or clothing.
Cryptocurrency kept or used mainly for the purpose of profit-making or investment, or to facilitate purchases or sales in the course of carrying on business,
will not satisfy the exemption. An example of where cryptocurrency would not be a personal use asset is where an individual taxpayer mines Cryptocurrency and keeps those Cryptocurrency for a number of years with the intention of selling them at opportune times based on favourable rates of exchange.
The ATO's proposed tax treatment of cryptocurrencies is as follows:
- Investment - if you are holding cryptocurrency as an investment, you will pay capital gains tax on any profits when you dispose of them
- Trading - if you are trading cryptocurrency for profit, the profits will form part of your assessable income
- Carrying on a business - if you are using or accepting cryptocurrency as payment for goods or services, the goods or services will still be subject to GST
- Mining cryptocurrency - if you are mining cryptocurrency, any profits you make will be included in your assessable income
- Conducting an exchange - if you are buying and selling cryptocurrency as an exchange service, you will pay income tax on the profits
- GST - sales and purchases of digital currency are not subject to GST from 1 July 2017. This means that you do not charge GST on your sales of digital currency and similarly, you are not entitled to GST credits for purchases of digital currency.
SMSF Compliance Issues
If the cryptocurrency is held in your SMSF, there are additional aspects you need to consider:
- Trust deed – trustees should check that their SMSF trust deed does not prohibit investments in cryptocurrency
- Investment strategy – cryptocurrency is a relatively new investment class. SMSF trustees should ensure that if wanting to invest in cryptocurrency, the investment strategy is up to date and specifically permits investment in that class.
- Sole purpose test – SMSF trustees need to be prepared and able to demonstrate that the sole purpose test of investing for retirement has not been breached by cryptocurrency investment (some parties may be concerned that it is a purely speculative investment, or gambling).
- Ownership – crucial to compliance with superannuation legislation is evidence that all investments are appropriately registered in the name of the fund trustees, as trustee for the superannuation fund. This is to ensure that the SMSF has a legal enforceable right to all of its assets (including cryptocurrency). There may be difficulties in achieving this, depending on the cryptocurrency type. Taking Bitcoin as an example, storage of Bitcoin is in a digital wallet. The SMSF name must be noted on the wallet, but fund members should also avoid linking their personal credit cards to Bitcoin wallets. Linked personal credit cards create compliance nightmares, as it is a breach of the rules that require SMSF assets to be kept separate from personal ones. A separately documented declaration of trust may help with attesting ownership. Cryptocurrency must be purchased using existing cash from the SMSF bank account to avoid related party issues (see point below).
- Transactions with related parties – cryptocurrency cannot be used as an in-specie contribution to the SMSF, nor can a SMSF purchase cryptocurrency from members or related parties (related party acquisitions are limited to listed securities and business real property).
- Valuation – trustees need to ensure appropriate records are available to confirm holding quantities and cryptocurrency prices on 30 June each year, since the SMSF financial statements are by law required to show all investments at their market value.
If you need further guidance on any of the above, please contact your Power Tynan adviser.