Cryptocurrency & Tax - What you need to know

Tax treatment of cryptocurrencies

The term cryptocurrency is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain. Cryptocurrency generally operates independently of a central bank, central authority or government.

The creation, trade and use of cryptocurrency is rapidly evolving. This information is the ATO's current view of the income tax implications of common transactions involving cryptocurrency. Any reference to 'cryptocurrency' in this guidance refers to Bitcoin, or other crypto or digital currencies that have similar characteristics as Bitcoin.

If you are involved in acquiring or disposing of cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances.

Everybody involved in acquiring or disposing of cryptocurrency needs to keep records in relation to their cryptocurrency transactions.

If you have dealt with a foreign exchange and/or cryptocurrency there may also be taxation consequences for your transactions in the foreign country.

Transacting with cryptocurrency

A CGT (Capital Gains Tax) event occurs when you dispose of your cryptocurrency. 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 fiat currency (a currency established by government regulation or law ), such as Australian dollars, or

• use cryptocurrency to obtain goods or services.

If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded.

If 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.

While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.

Exchanging a cryptocurrency for another cryptocurrency

If you dispose of one cryptocurrency to acquire another cryptocurrency, you dispose of one CGT asset and acquire another CGT asset. Because you receive property instead of money in return for your cryptocurrency, the market value of the cryptocurrency you receive needs to be accounted for in Australian dollars.

If the cryptocurrency you received cannot be valued, the capital proceeds from the disposal are worked out using the market value of the cryptocurrency you disposed of at the time of the transaction.

Example

On 5 July 2017, Katrina acquired 100 Coin A for $15,000. On 15 November 2017, through a reputable digital currency exchange, Katrina exchanged 20 of Coin A for 100 of Coin B.

Using the exchange rates on the reputable digital currency exchange at the time of the transaction, the market value of 100 Coin B was $6,000. For the purposes of working out Katrina's capital gain for her disposal of Coin A, her capital proceeds are $6,000.

Cryptocurrency as an investment

If you acquire cryptocurrency as an investment, you may have to pay tax on any capital gain you make on disposal of the cryptocurrency.

You will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its cost base. Even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.

If you hold the cryptocurrency as an investment, you will not be entitled to the personal use asset exemption. However, if you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.

If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You cannot deduct a net capital loss from your other income.

You must keep records of each cryptocurrency transaction to work out whether you have a made a capital gain or loss from each CGT event.

Example

Terry 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, Terry's adviser told him that he should invest in cryptocurrency. On that advice, Terry purchased a number of different cryptocurrencies which he has added to his portfolio. Terry 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 Terry sells some of his cryptocurrency, the proceeds would be subject to CGT because he has acquired and held his cryptocurrency as an investment.

Personal use asset

Some capital gains or losses that arise from the disposal of a cryptocurrency that is a personal use asset may be disregarded.

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

• 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 those situations the cryptocurrency is more likely to be held for some other purpose.

Except in rare situations, the cryptocurrency will not be a personal use asset:

• when you have to 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).

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.

Only capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded.

Example 1

Michael wants to attend a concert. The concert provider offers discounted ticket prices for payments made in cryptocurrency. Michael pays $270 to acquire cryptocurrency and uses the cryptocurrency to pay for the tickets on the same day. Under the circumstances in which Michael acquired and used the cryptocurrency, the cryptocurrency is a personal use asset.

Example 2

Peter has been regularly keeping cryptocurrency for over six months with the intention of selling at a favourable exchange rate. He has decided to buy some goods and services directly with some of his cryptocurrency. Because Peter used the cryptocurrency as an investment, the cryptocurrency is not a personal use asset.

Example 3

Josh pays $50 to acquire cryptocurrency each fortnight. During each of the same fortnights, he uses the cryptocurrency to enter directly into transactions to acquire computer games. Josh does not hold any other cryptocurrency.

In one fortnight, Josh identifies a computer game that he wishes to acquire from an online retailer that doesn't accept the cryptocurrency. Josh uses an online payment gateway to acquire the game. Under the circumstances in which Josh acquired and used the cryptocurrency, the cryptocurrency (including the amount used through the online payment gateway) is a personal use asset.

The above information was sourced direct from www.ato.gov.au