It seems that everywhere you turn people are talking about Bitcoin and other cryptocurrencies.
A cryptocurrency is defined on Wikipedia as “a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets.”
But, assuming you already knew that, what are the main things you need to know when it comes to taxing this brave new world of cryptocurrencies, and what is the ATO doing about them?
1. A cryptocurrency similar to Bitcoin is not a “currency” for tax purposes
The ATO in its published guidelines states that Bitcoin is not a currency, but rather is treated as an asset, the price of which in AUD changes over time. This is important because it means that there are tax consequences from the acquisition and disposal of a unit of cryptocurrency, and as discussed below the exact nature of the tax implications will depend on the taxpayer’s related activities as well as their intention when they acquired the cryptocurrency.
2. How does CGT apply to cryptocurrency acquired as an investment?
Just like any other investment, you make a taxable capital gain when you sell the cryptocurrency for more than your purchase cost, and you make a capital loss when you sell for less than you originally paid. For capital gains, if you are an Australian resident individual and hold the investment for at least 12 months then you will be able to claim the 50% CGT discount, meaning you only pay tax on half of the actual gain.
Take a simple example – Lisa buys a parcel of Bitcoin for $3,000 as a long term investment, and sells the entire parcel for $9,000 three years later. Her gross capital gain is $6,000, which will be reduced to a taxable capital gain of $3,000 by the 50% discount.
Also like other investments, however, be aware that if the ATO treats you as a “trader” or “speculator”, i.e. on the basis that your purpose was one of buying and selling for short term profit rather than long term capital growth, then any gains would simply be taxed to you as income, without any access to the CGT discount and without the ability to offset any capital losses from other investments against the cryptocurrency gains. The only good news is that trading losses can be offset against other types of income.
3. What is this “personal use” exemption I keep hearing about, and how does it help?
A personal use asset (such as a car, boat or holiday home) is exempt from CGT if it costs less than $10,000. The ATO will accept that cryptocurrency is a personal use asset if you can show that you acquired it purely to hold and then exchange for other goods and services, and not with the intention of making a profit or in the course of carrying on a business, although the question of intention can be quite subjective and is not always so easy to prove.
In Lisa’s example above, if she could show that she acquired the $3,000 parcel of Bitcoin with the intention of using it to pay for goods or services, and then six months later cashed in the entire amount for $5,000 as partial payment for a home renovation, this can be treated as a personal use asset and the $2,000 profit would not be taxed.
4. What sort of records do I need to keep?
The ATO states that it would expect you to have records showing:
- the dates of any purchases and sales of cryptocurrency
- the value in AUD of each transaction
- the identity of the other party (e.g. their cryptocurrency address)
- the nature and purpose of the transaction.
As cryptocurrency such as Bitcoin is generally traded on an exchange, and by its very nature the transactions will be recorded electronically, obtaining and retaining records of the first three items should not be too difficult.
With the nature and purpose of the transaction, in some cases this will be more obvious than others, in line with the points discussed above, but this will be the area most open to ATO Interpretation, so it is critical that you properly document your intentions from the outset.
5. If someone pays me using cryptocurrency for goods or services provided to them in the course of carrying on my business, is the payment taxable?
Yes, the ATO views this in just the same way as being paid with other goods or services, i.e. as a form of barter arrangement. The taxable amount is the AUD value of the non-cash consideration for your goods or services at the time of the transaction.
Similarly, if you use cryptocurrency to pay for goods and services that you use in the course of carrying on your business, the AUD value of the payment would be treated for tax purposes in the same way as if you had paid the equivalent amount in cash.
Returning to Lisa’s example in point 3 above, if she made a $2,000 profit on buying Bitcoin and then instead of using it for private purposes she sold it in exchange for receiving marketing services for her business, the profit would be included in the taxable profit of the business.
6. What are the tax implications of “mining” cryptocurrency such as Bitcoin?
It is likely that if you engage in activities to acquire cryptocurrency by mining additional units, the ATO would treat these activities as a business, and the AUD value of units acquired would be assessable income in the year of acquisition.
On the assumption that the cryptocurrency units are treated as either trading stock or CGT assets, however, then any further unrealised increased in the value of units held will not be taxable until they are eventually realised on a later disposal.
In addition, if there are direct costs such as electricity or the depreciation of equipment dedicated to cryptocurrency mining activities, these should be tax deductible against the income received from the cryptocurrency mining business.
7. Cryptocurrency transaction reporting just got a whole lot stricter
Regulators are catching up with the brave new world of digital currency.
Under changes to Australia’s anti-money-laundering laws that will come into effect on 3 April 2018, cryptocurrency exchanges will need to sign up to a new Digital Currency Exchange Register, and transactions exceeding $10,000 will need to be reported to AUSTRAC in line with the existing rules for bank transfers and cash transactions.
This in turn makes it much more likely that Crytocurrency transactions will come to the attention of the ATO, and you will need to be ready to explain not only where the money came from, but also to show that you have followed the ATO’s rules discussed above.