These days, cryptocurrency is seemingly everywhere we look. But despite being regularly discussed on the news, in podcasts, and in the workplace, one aspect that is often lacking in the narrative is the tax implications of cryptocurrency.
The rise of cryptocurrency as a popular trading and investment choice has been accompanied by an increase in ATO data-matching review activity – including naming cryptocurrency as one of its core focus areas for 2021 income tax returns. More and more, the ATO is aware that a disposal of cryptocurrency has taken place and will expect some form of disclosure.
The ATO has recently published guidelines on its website outlining some of its views on the tax implications of cryptocurrency with a view to improving people’s understanding of tax on cryptocurrency in Australia. There are a few aspects to consider, which we have outlined below.
Capital Gains Tax on Cryptocurrencies
A capital gain is the profit made from the disposal of an asset, and cryptocurrencies are viewed as a capital gains tax asset, meaning that those who invest in crypto will be assessed on capital gains (and losses will be capital in nature). The positive here is that when held for 12 months, cryptocurrencies can be eligible for the 50% capital gains tax discount. However, any losses will be capital in nature, which can only be applied to offset capital gains and not ordinary income.
Disposal of cryptocurrencies (or exchanging your digital currency for something else in order to achieve capital gain) can occur when cryptocurrency is:
- Sold
- Gifted
- Used to purchase something (such as a car)
- Exchanged for another cryptocurrency
The exception to this is “chain splits”, which are not treated as a disposal. A chain split occurs when a single original coin separates into several more distinct projects.
Cryptocurrencies Used in Businesses
For businesses that derive their income from trading cryptocurrencies (rather than a business that simply uses cryptocurrencies as a method of transacting with its customers and suppliers for other goods), the trading stock rules will apply.
The usual indications of carrying on a business, such as profit, intention, and scale/frequency of activity, are used to determine if a taxpayer is carrying on a business of trading cryptocurrencies. It is important to note that this scenario is less likely than the CGT example above.
Isolated Commercial Transactions
An Isolated Commercial Transaction is another instance when cryptocurrency is not treated as a Capital Gains Tax asset. In this situation, a taxpayer enters a transaction with a distinct profit-making intention – usually on a short-term basis or with a particular strategy in mind.
A taxpayer would usually only seek to argue this position when a loss has occurred, and they want to deduct the losses against their income rather than have a capital loss, but this can be difficult to prove in practice, and can also be contested by the ATO (as seen in the recent case of Greig v Commissioner of Taxation [2020] FCAFC 25 , which was in relation to a sophisticated investment in a single non-crypto security).
Cryptocurrency as a Personal Use Asset
Interestingly, the ATO acknowledges that cryptocurrencies can be treated as a “personal use asset” if kept mainly to purchase items for personal use or consumption. A personal use asset is exempt from CGT, gains and losses disregarded, if it is acquired for less than $10,000. However, there is a limited amount of guidance on how to prove that cryptocurrency is a personal use asset. With these waters yet to be tested in the courts, there are limited precedents to rely on, specifically regarding cryptocurrencies.
Loss or Theft of Cryptocurrency
The ATO permits a capital loss to be reclaimed when cryptocurrency is lost or cannot be recovered. This can occur when a private key is lost and cannot be restored.
How to Calculate Cryptocurrency Taxes
As with all things tax related, we strongly encourage thorough recordkeeping to document the cost of the cryptocurrency, any transactions affecting it, and the purpose of owning it. This will form a strong foundation in order to calculate your cryptocurrency taxes.
It’s important to note that the above is general commentary only, and is not to be taken as advice. But if you have any questions about your specific circumstances, or would like to further discuss cryptocurrency tax implications with a cryptocurrency tax attorney or accountant, get in touch with our BlueRock accounting team for a free consultation today.
