Tax considerations for cryptocurrency
Cryptocurrency is fast becoming more than just a volatile currency to be feared. Now in 2021, understandably, due to its potential for profit, it is now an attractive investment opportunity for many Australians. However, just because cryptocurrencies like Bitcoin are decentralized, unfortunately it doesn’t mean they are tax-free.
Investing in Bitcoin or similar will more than likely have an impact on your taxes, especially if you make a profit. Here, we have detailed some key considerations to bear in mind when investing in cryptocurrency. These will hopefully help you understand what you need to do, in order to meet your tax obligations.
It’s important to bear in mind that the rules around tax and regulation are constantly changing. The tax treatment of them changes quickly, so it’s essential to remain up to date – we can help you with this!
If you’re thinking about investing, or already have, and don’t want to find yourself with an unexpected tax bill, please read on!
What exactly is a cryptocurrency?
If you’ve got this far you probably know the basics! But, in its simplest form, Cryptocurrency is virtual money in the form of tokens or “coins.” While some currencies have crossed over to the physical world with credit cards for example, the large majority are completely digital. The “crypto” in cryptocurrencies refers to a high
level of cryptography, or security, created using code which allows for the creation and processing of digital currencies and their transactions. This happens securely without the need for links to a central bank or organisation related to the government, making the currency volatile but also potentially more profitable.
How is cryptocurrency taxed in Australia?
Any profit made is taxed based on its AUD value when it is exchanged for other cryptocurrencies, goods and services.
Transactions, whether they happen in Australia or elsewhere, should be reported on your tax return. These include, but are not limited to: buying, selling, trading, mining, giving and/or receiving cryptocurrency. Unless you are running a crypto trading business or investing for your business you will most likely be subject to capital gains tax (see exemptions below) rather than income tax. This applies to casual trading, investing as a hobby etc, as the currency is treated like property or an asset.
It’s worth bearing in mind that if you’re classed as a cryptocurrency investor and are subject to capital gains tax on your investments, you can hold your currency for more than 12 months and be eligible for a 50% CGT discount.
Likewise, If you are holding your currency on revenue account and trading ‘crypto-to-crypto’, each transaction will likely have a taxable event, with your net profit or the difference between what you paid for the cryptocurrency and the market value of that you receive in return being taxable.
When is cryptocurrency not taxed?
There are a number of situations where cryptocurrency won’t be taxed — in some cases, you may be eligible for the ‘personal use asset exemption’. Capital gains tax won’t be applicable if:
- Cryptocurrency is used to purchase personal use goods and services that accept it as a form of payment.
- The capital gains generated from personal use assets are less than $10,000. This is likely to occur when coins were purchased informally and/or mined as a hobby rather than an investment.
It’s important to note that if you are a cryptocurrency investor, you won’t make capital gain (or loss!) until you sell or trade for goods or services, whether the market value of your investment increases or not.
It is very important to keep detailed records of all cryptocurrency transactions, for both individuals and businesses, whether trading is a casual hobby or as part of a business strategy. These records should, if applicable in your circumstance, include:
- The date of each transaction.
- The reason for each transaction.
- What the value of each cryptocurrency transaction was at the time that it was originally made.
- A name and a contact of who else was involved in the transaction.
- If for personal use, proof that cryptocurrency has been used to purchase goods or services.
- Transaction receipts of all purchases or transfers.
- Digital wallet records.
- Accountancy software costs if applicable.
- Any agent costs if applicable.
Cryptocurrency tax may seem pretty complex, however with a strategy for what you plan to spend, projected taxes and researching exemptions as well as the watertight record keeping as mentioned above you should be able to keep your cryptocurrency taxes to a minimum or none at all!
If you are thinking of investing or have already and would like help with your cryptocurrency related taxes please contact us and one of our experienced team members will be happy to take the stress away and tailor a solution to meet your needs. We are armed with the latest rules set out by the ATO and will guide you on how to make the most of cryptocurrencies without getting stung by an unexpected tax bill.