Cryptocurrency is used to describe encrypted virtual currencies which exist as digital tokens. This digital currency operates outside of government via decentralised ledgers or digital wallets but can be exchanged for online goods and services.
The profit made from cryptocurrency is determined in AUD amounts when you exchange cryptocurrency for fiat currency, other cryptocurrencies or goods and services.
How is cryptocurrency taxed?
The ATO treats cryptocurrency as a form of barter exchange and as such, has taken a lenient approach to pursue taxation of crypto assets thus far with the main condition being that the transactions are recorded and valued correctly.
However, now that cryptocurrency is attracting more mainstream investors and there is a lot more data available, the ATO routinely checks the taxation obligations of individuals and businesses that hold crypto assets.
Business or professional
Crypto profits may be treated in the same manner as personal or business income and as a result is subject to the relevant type of income tax when the cryptocurrency was gained through business activities.
These activities may include:
- Commercial cryptocurrency mining
- Professional crypto trading
- Operation of cryptocurrency-related businesses
- Business-related cryptocurrency transactions
If your cryptocurrency activities do not fit into the above category, the resulting profits or losses will most likely be considered personal investment gains or losses and will be subject to capital gains taxes instead.
Capital Gains Tax
A CGT event occurs in the following scenarios:
- Sell or gift cryptocurrency
- Buy for yourself
- Trade or exchange cryptocurrency for another crypto or fiat currency
- Mining crypto as a hobby
- Convert your cryptocurrency to fiat currency (e.g., Australian dollars)
- Use it to obtain goods or services
If you make a capital gain when you dispose of cryptocurrency, you’ll need to pay tax on some or all of that gain. For example, if you buy cryptocurrency as an investment and then later sell or exchange your digital coins at a higher price which results in a capital gain.
However, if you hold your cryptocurrency for more than a year before selling or trading it, you may be entitled to a 50% CGT discount. Even if the market value of your cryptocurrency changes, you won’t make a capital gain or loss until you dispose of your holdings.
If you dispose of the cryptocurrency and the proceeds are less than what you paid to purchase them initially, this will be acknowledged as a capital loss. Capital losses can be used to reduce capital gains made in the same financial year or a future year, including investments outside of cryptocurrency.
Are there tax-exempt situations?
There are certain circumstances where cryptocurrency transactions are exempt from CGT if:
- The crypto is used to purchase goods or services for personal use, such as booking hotels online or shopping at retailers that accept digital currency, and
- The capital gains you make are from personal use assets which are acquired for less than $10,000.
Crypto Transaction Records
The ATO uses data supplied by Australian cryptocurrency exchanges, state revenue offices and shares data to cross-reference the crypto gains and losses information in your tax returns.
Therefore, it’s imperative to keep records of all transactions, including dates, AUD value, the nature of the transactions, exchange receipts, legal costs and other parties involved (even a crypto address is enough) in the sale or purchase of cryptocurrency.
Whether or not your activities equate to running a business will depend on the level of degree and is ultimately determined by weighing up your specific circumstances.
As a general rule (however not exclusively), where activities are performed for a profit-making purpose, repetitious, involve on-going effort, and include business documentation, the activities would amount to the carrying on of a business.
Don’t get caught out by the ATO’s increasing focus on cryptocurrency.
If you’re unsure of your crypto reporting requirements and tax obligations, contact your accountant for a comprehensive check on your crypto recording systems and transactions. If you are after bookkeeping services associated with trading in cryptocurrency, contact Numble.