By now, you’ve probably heard of cryptocurrencies such as the world famous bitcoin. After the sky-rocketing success of this platform, competitors like Litecoin, Ripple and Tron are quickly growing in popularity and widespread use. With the rise of cryptocurrency being used by the wider population for investment, transactions and even business, this new form of digital age currency has brought with it the need for a new perspective and understanding of taxation. To make sure you are up to date and in the know with the latest cryptocurrency taxation requirements, we’ve compiled this comprehensive update on cryptocurrency tax issues and tax planning strategies.
Cryptocurriences are digital assets, regulated through the use of encryption techniques to generate more units of the currency in a controlled fashion. The encryption techniques also verify transactions on a blockchain, all of this usually operating independently of a government, bank or central authority. This independence makes cryptocurrency unique in its consideration by the Australian Taxation Office and has been evolving since the beginning of cryptocurrencies themselves. The following information refers to the current income tax implications of transactions involving cryptocurrencies as of July 2018. Check back regularly for updated information, or visit www.ato.gov.au for updates.
If you are an Australian expat who is involved in the acquisition or disposal of cryptocurrencies, you will need to keep a record of your cryptocurrency transactions for tax purposes. In fact, everybody does. If you have made cryptocurrency transactions involving foreign exchange, these transactions may incur taxation consequences in the foreign country in which your cryptocurrency transactions were involved. Make sure to check the local cryptocurrency taxation considerations in the country in question.
Disposing of your cryptocurrency results in a Capital Gains Tax (CGT) event occurring. Disposal of cryptocurrency refers to:
- selling or gifting your cryptocurrency
- reading or exchanging cryptocurrency for another cryptocurrency, goods or services
- converting your cryptocurrency into a fiat currency e.g. Australian dollars
If capital gain is made through any of these means, the gain may be partially or fully taxed. Particular personal use asset cryptocurrency disposals that result in capital gains or losses may be disregarded. When the disposal of your cryptocurrency is a business related transaction, however, profits made on the disposal will be considered as ordinary income and not capital gain.
When considering taxation issues and cryptocurrency disposal, it is also important to note that each different cryptocurrency in a digital wallet is considered a separate CGT asset. It is a good idea to keep a record of all your cryptocurrency disposals so you are able to provide accurate information come tax time.
Exchanging one Cryptocurrency for Another
Capital gains are calculated on exchanges from one cryptocurrency to another, as this exchange is from one CGT asset to another. This means that you are technically receiving property rather than money when you dispose of the original cryptocurrency, the CGT is calculated off the market value in Australian dollars of the cryptocurrency that is received. If it is impossible to calculate the value of the cryptocurrency you receive, CGT is calculated from the market value of the disposed of cryptocurrency. Take note of the market value of both cryptocurrencies at the time of the exchange, as this information is important to be able to calculate a profit or loss.
Investing in Cryptocurrency
As with all cryptocurrency disposals, your investment cryptocurrency may be regarded as a CGT asset and therefore disposing of investment cryptocurrency may incur tax consequences. When you receive more money for your cryptocurrency when it is disposed of than you paid for it, you are receiving a capital gain. Your capital gain is only calculated when you dispose of you cryptocurrency, even if its market value fluctuates while it is still in your possession. This is important to note when considering the right time to cash in.
Possession of investment cryptocurrency means you will not be entitled to the personal use asset exemption. If you have the cryptocurrency for a minimum of 12 months, you will be able to use the CST discount in order to lower the CGT when you dispose of the cryptocurrency. A capital loss on your disposal can be used to lower future capital gains, but cannot be deducted from other income in the same tax year.
Keeping track of all your cryptocurrency transactions is key to making sure you are taxed correctly, so be sure to keep a log of all transactions throughout the tax year from any digital wallet in your possession.
Cryptocurrency as a Personal Use Asset
Your cryptocurrency will be treated as a personal use asset for tax purposes if it is used in certain ways, depending on the length of time the cryptocurrency has been in your possession, what has been done with the cryptocurrency since it’s been in your possession and how it is disposed of or transacted. The longer the cryptocurrency is in your possession, the less likely it is to be considered a personal use asset.
A cryptocurrency is not considered a personal use asset if it is being used as an investment, as a scheme to make profit, or in carrying out a business transaction. When determining whether a cryptocurrency is a personal use asset, the time of disposal is the time frame used.
Cryptocurrency is considered a personal use asset when it’s used to purchase items such as food or other items for consumption and personal use. When this is done with cryptocurrency acquired with Australian dollars or another cryptocurrency, it strongly suggests the cryptocurrency will be considered a personal use asset. It is important to keep a track of the uses of your cryptocurrency, as this information will be used to decide how your cryptocurrency will be examined at tax time.
When your cryptocurrency is lost or stolen
Capital loss may be claimed if your cryptocurrency is lost or stolen. In this context, the cryptocurrency is considered lost when it cannot be replaced. To claim this, you would need to provide evidence of when you first acquired and when you lost the private key to your cryptocurrency, the digital wallet address the private key is attached to, any costs incurred when the cryptocurrency was acquired and proof that you are in possession of the hardware from which the private key was stolen or lost.
To ensure you are able to claim a capital loss in the case of your cryptocurrency being lost or stolen, keep this information secure and keep copies.
Business and Cryptocurrency
Cryptocurrency received by a business as a result of a chain split is regarded as stock and needs to be treated as such by being brought to account at the end of the financial year. Using cryptocurrency in business means stock rules apply to the transactions and disposal of the cryptocurrency, rather than CGT rules.
Carrying on a Cryptocurrency business
When the business you carry on holds cryptocurrency for sale or exchange, stock rules apply to the cryptocurrency instead of CGT rules. The sale or exchange of this cryptocurrency results in proceeds that will be regarded as ordinary income for the business and the cost of acquiring the cryptocurrency in the first place is deductible in your business’s tax return.
To be regarded as a business which involves cryptocurrency, your business must be a cryptocurrency trading, mining or exchange business, including ATMs that deal with cryptocurrency. By acquiring and disposing of cryptocurrency, you are not automatically treated as carrying on business. To be regarded as carrying on business with cryptocurrency, you would usually be carrying on your transactions and disposals for commercial reasons in a viable way, preparing accounting records for a product and intending to make a profit.
When starting a business involving cryptocurrency, be sure to record when the business is started, along with all the costs incurred in acquiring the cryptocurrency used within the business, all transactions, sales and exchanges of the cryptocurrency, how long the cryptocurrency is held in your possession and the nature of how the cryptocurrency is used.
Business Transactions Involving Cryptocurrency
Businesses that are not cryptocurrency businesses but use cryptocurrency must account for the cryptocurrency used within the business as you would other assets used within the business. The value of any cryptocurrency received by the business needs to be recorded in Australian dollars as part of the ordinary income of the business. You can find the value in Australian dollars at a reputable cryptocurrency exchange.
A deduction for your business is available on the market value of cryptocurrency purchased as trading stock. Always record the market value of your cryptocurrency as Australian dollars or the currency of the country you are operating from at the time of acquisition and disposal of all business related cryptocurrency.
Salary or Wages paid in Cryptocurrency
If you have a valid salary sacrifice arrangement with an employee to pay cryptocurrency as remuneration rather than Australian dollars or the currency of the country from which you operate, this payment is considered a fringe benefit and as the employer, you are subject to the provisions of the Fringe Benefits Tax Assessment Act of 1986.
All salary and wages paid as cryptocurrency must be recorded and logged as fringe benefits and declared as such on your Australian tax return.
If you have any further questions regarding cryptocurrency tax issues or need to speak to a professional about your tax needs, don’t hesitate to contact the friendly and helpful team at Expat Tax Services today.
In short Shane's a tax and software techno-geek, who recognised that Australian expats were unable to obtain the specialist advice and quality service, that they needed from their accountants. Accordingly, Shane founded Expat Tax Services to provide Australian expats with access to specialist, quality advice at fair and reasonable prices (no hourly rates, fees quoted upfront with unlimited support included) . . . receive the support and advice you need without having to take second-mortgage to pay your accountant's bill! Speak to Shane & the team today.