Understanding Cryptocurrency and its Tax Implications | Cryptocurrency Q&A

What is Cryptocurrency?

Cryptocurrency(Crypto) is a digital currency that you can buy, sell, and invest in through an online system. It is commonly used as a source of investment and does have tax implications depending on whether you are investing or trading crypto and how you use it.

What are the main features of crypto?

Crypto tech can be used to record transactions in a ledger open to public view. It is a decentralised finance network (DeFi) platform that features banking without intermediary, speedier international trans, no middle transactions fees, trading 24/7 and higher earnings on savings.

What are some pros and cons of using crypto?

Pros

•   anonymity of transactions

•   transparent processes 

•   immediate settlement

•   free of government controls

•   high growth returns

Cons

•   high volatility and potential for large losses

•   unregulated and not backed up by government reserve

•   open to cyber hacking

•   high mining costs of electricity and tech resources

What are the tax implications for crypto?

If you acquire crypto as an investment and you decide to dispose it through selling, gifting, trading, or converting you may have to pay tax on any capital gain made on this disposal.

If you hold crypto as a personal use asset it is generally tax exempted. However, if you buy personal goods after a long holding period, you will have to pay capital gains tax(CGT) due to benefitting from the increase in value during the holding period.

When cryptos are held for investments, profit making or business purposes, all profits are assessable for income tax.

Below are some typical tax treatments for crypto transactions.

What are the tax consequences of buying crypto?

Buying crypto is tax free if you purchase with fiat currency or buy and hold your crypto. However, if you buy crypto with another crypto it is taxable under CGT as the ATO sees this as a transaction. If you are buying as a business the amount paid will be tax deductible under the trading stock rules.

Does CGT apply to all cryptos I sell?

Selling for a fiat currency or for another crypto is taxable where 100% of the profit will go to CGT and at 50% in the following years under the CGT discount. If you are selling it as a business, the profit of sale will be subject to ordinary income under the trading stock rules.

What is a capital gain?

A capital gain occurs when the cost base (purchase price plus additional fees made on acquiring crypto) is lower than the sale price and a capital loss is where the sale price is lower than the purchase price. For example, if you buy 1 BTC (Bitcoin) for $1,000 with a $100 fee and then a few months later you decide to sell the 1 BTC for $2,000 with a fee of $100. You would have a capital gain of $800 which totals from the sale price $1,900 deducted by the cost base $1,100. In the case, where you have a capital loss, you will be able to carry it forward to future years.

Note: you can also receive a CGT discount of 50% if you hold your crypto for more than 12 months.

What happens if I move crypto from one wallet to another?

Moving between your own wallets is tax free but if you pay transfer fees in crypto, CGT will apply as it is considered spending an asset.

What is the threshold for spending crypto?

•   CGT applies when:

          •   Item value is over $10,000

          •   Goods are bought for business use or investment

          •   Goods bought with crypto held for a long time

•   Tax free if:

          •   Item is bought for personal use

          •   Crypto used in short period of time

          •   Item value price is under $10,000

Is gifting crypto taxable?

Giving a gift or selling a gift applies to CGT whereas receiving a gift is tax free. If you decide to donate you crypto, this will be tax deductible.

What is mining crypto and what tax applies?

Mining crypto is gaining crypto by completing other works without putting down any money. If you use mining as a hobby, it is tax free whereas mining as a business applies to income tax. If you decide to sell your mined coins, it will be taxable under CGT.

How are airdrops and forks taxed?

Airdrops are when investors are distributed additional coins at no costs. If you receive airdrops it is included in your ordinary income using the fair market value on the day you received them. CGT will apply when you decide to sell or trade your airdrops.

Forks happen when a community makes a change creating another branch of a currency. Investing new coins are not subject to income tax however if you use them for trading, the trading stock rules apply. Like airdrops any type of disposal is subject to CGT.

Have you been keeping records?

It is important that you keep a detailed record of all your crypto transactions to calculate and meet your tax obligations. You can use a record keeping system such as a spreadsheet or have scanned digital copies of your records and receipts.

What records should I keep?

•   The date of transaction

•   Value of crypto in AUD at the time of transaction

•   What was involved in the transaction such as the other party etc.

These records can be found in:

•   Purchase or transfer receipts

•   Exchange records

•   Records of agent, accountant, and legal costs

•   Digital wallet records and keys

•   Software costs related to managing your tax affairs.

The ATO requires you to keep these records for a 5-year period from either when you prepared or acquired the records or when you completed the transactions.

Need help?

If you need help with anything, please feel welcome to contact our friendly team at Wilson & Assoc Chartered Accountants.

Source: Australian Taxation Office (ATO)