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 (this includes trading directly from one cryptocurrency to another, i.e. from Bitcoin to LiteCoin). 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.
It’s important to keep a record of all trades you make and their buy and sell amount and costs. Information which needs to be recorded includes:
- Timestamp of the transactions;
- Value of cryptocurrency in Australian dollars at the time of each transaction; and
- Reason for each transaction and who’s the other party involved (could be just their address).
The sorts of records you should keep include:
- Receipts of purchase or transfer of cryptocurrency;
- Exchange records;
- Records of agent, accountant and legal costs;
- Digital wallet records and keys; and
- Software costs related to managing your tax affairs.
The following software can be used to make your record keeping process simpler:
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.
It’s important to remember normal substantial rules apply for deductions being claimed against cryptocurrency income, just like any other business expense (https://www.ato.gov.au/Business/Income-and-deductions-for-business/). The non-commercial loss rules will also apply.
If you have any queries about taxation of cryptocurrencies, please contact your trusted adviser today!