Introduction

Cryptocurrency – is it really a currency?

Currently the ATO does not recognise crypto as a currency. However, this view may change when cryptocurrencies become more widely accepted in the global marketplace.

Ok, so if it’s not a currency, what is it?

The short answer is… it depends on how it’s being used, and what your intention is.  This means it could be classed as either;

• An asset, similar to shares, bonds and real property.
• Trading stock, used in your business, or;
• A combination of both.    

Confused?

 Then read on, for a basic overview of the current tax treatment of your investment in cryptocurrency, to help you be prepared this tax season.

 

Firstly, some housekeeping….

Keeping Records

It is crucial to keep accurate records for your cryptocurrency transactions. This will make it easier for your tax professional at tax time, and therefore, cheaper for you!

You may also be asked to provide copies of your records to the ATO, in the event of an audit or dispute, so it makes sense to keep detailed records to substantiate your declarations and claims.

You will need to keep the following information;

• The date of the transaction
• The amount in Australian Dollars
• Details about the transaction – what it was for
• Details about the other party –  who they were, their crypto address etc.

You will need to keep your record for a minimum period of 5 years.

There are a few handy apps and tools to make tracking your crypto transactions fast and easy.

Current Tax Treatment

Currently, cryptocurrency transactions will be taxed differently, depending on whether the holder is an investor, a “personal user,” or a cryptocurrency trader, most tax payers are likely to fall into the first 2 categories;

Investors

An investor is a person who, according to Investopedia “commits capital, with the expectation of financial returns” basically, with the intention of making a profit.

  In this case, the cryptocurrency will be viewed as an asset for Capital Gains Tax (CGT) purposes, much the same as shares, bonds and other real property.

As such, any gain, or loss, upon sale (disposal) of your cryptocurrency, will need to be reported in your income tax return as a CGT event.

If you have held the “crypto asset” for longer than 12 months, then any gain you make upon sale can be discounted by 50%.  The remaining 50% is included as assessable income in your tax return and taxed at your marginal rate. 

If, however, you make a loss on sale, the loss can only be offset against future capital gains events, and is carried forward each year, until such time that it can be utilised.

The bottom line…. capital losses cannot be used to reduce your ordinary assessable income (i.e. wages, salaries, interest and dividends etc.)

Personal Users

Personal users are able to disregard any capital gain made, where the cost base (usually the acquisition cost) of the personal use asset, (e.g. a Boat ) if it was purchased using cryptocurrency valued less than $10,000.  However, the downside is, any loss incurred is also disregarded, but I guess you can’t have it both ways!

This means that you must have acquired the cryptocurrency solely to purchase a personal use asset, in order to access the CGT exemption, for example;

Alex wants to purchase a sound system, he finds the one he wants in an online sale for $9,800 “crypto”, which is less than its Aussie dollar cash payment amount of $10,500, to cash in  on the bargain, Alex opens a crypto account and buys $9,800 value of crypto. The next day, when Alex uses his cryptocurrency to purchases the sound system,  the crypto has increased  in value by 50%, and he has made a gain of $4,400! Does Alex have an obligation to report the gain to the ATO?

Because Alex purchased the crypto with the sole intention to acquire the personal use asset, in this case, the sound system, he will not need to declare the capital gain in his tax return because it is classed as a personal use asset under $10,000.

The fact that the cryptocurrency must have been used or kept primarily for “personal use or enjoyment,” has caused taxpayers a considerable amount of confusion. According to their blog, the ATO are due to release an up- to-date  “Personal Use Asset” definition,  which will provide more clarification, in the next few weeks. We will update you as soon as it’s released.

In summary …. If you have purchased cryptocurrency with a view to make a profit, in course of carrying on a business, or as an investment, then it is not classed as a personal use asset, and it is not exempt from CGT, regardless of whether your crypto cost base was less than $10,000, or not.

Cryptocurrency Traders

What makes a cryptocurrency trader different from a cryptocurrency investor, especially when both have the intention to make a profit?  A few indicators are;

• You have a high volume of buy & sell transactions – the higher the amount of sales and purchases, the more likely you are to be “carrying on a business” as a trader
•  You will have a business strategy, spend a significant amount of time on study and analysis of long term trends, and keep detailed records of your transactions, just like you would in any other business.
• The amount of capital you have invested is not a necessarily a major indicator that you are carrying on a business.
• Income from your crypto trading activities, is your main source of income…… i.e. you have no other employment or self-employment income

If you are classified as a cryptocurrency trader, you will include your Cryptocurrency sales as business income in your tax return and your cryptocurrency purchases as cost of sales.

  You will also be required to include the” value “of any cryptocurrency you have “on hand” at the 30^th June, as assessable income, even though you haven’t actually sold it.

As you are operating a business you may be able to claim other operational expenses such as;

• Bank and Trading Fees
• Accounting & Financial Planning Fees that relate to your business
• Publications, subscriptions and software costs
• Home office, stationary, & a percentage of internet and telephone costs
• Seminars, training & travel expenses

Unlike, cryptocurrency investors, your trading income will be treated as ordinary income and included in your tax return as assessable and taxed at your marginal rate. Further, any loss incurred, may be offset, subject to non-commercial loss provisions, against any other assessable income (i.e.  wages and self-employment income) to reduce your income tax liability.

There is also the opportunity to cash in on the small business income offset, allowing you to access a potential tax saving of up to $1,000.

GST

From 1 July 2017, sales and purchases of digital currency are no longer subject to GST.  However, this is currently under review by the ATO.

Generally, where you are not “carrying on a business”, there are no GST implications, if you are simply purchasing goods and services, online, or instore, in cryptocurrency.

Where you are carrying on a business, and you receive cryptocurrency in return for goods and services you will need to keep a record of the amount received in Australian dollars, and you may be required to charge GST and report to the ATO.  You may also be able to claim GST credits on any purchases you made in the course of your business……. We will discuss GST more in our next blog……..

ATO – What they doing to pick up crypto transactions….

Because cryptocurrency transactions on the distributed ledger are public,  this means transactions can be traced back to an individual’s wallet address, making it easy for the ATO to identity any gains or losses that have occurred during the financial year.  Even transactions involving highly secure “anonymous” cryptocurrencies like Monero can be tracked.

The ATO has highly sophisticated data matching technology, which will enable it to track and trace any use of cryptocurrencies within Australia. The ATO can also obtain data from overseas Tax Collection Agencies.

In fact, the ATO can undertake deemed assessments, if they believe taxpayers have not declared profits from crypto transactions, in cases where profits were not disclosed, but net asset wealth increased significantly.   They are able to use data matching technology to track purchases of assets, such as boats, cars and real estate, and deem that income was generated to facilitate the purchases.

The ATO also has the ability to  access taxpayers bank accounts to identify any unusual transactions.(e.g. via Austrac)

Penalties

If you fail to declare gains or profits from your cryptocurrency transactions in your income tax return, to the ATO, the penalties can be harsh.

You will be required to pay the shortfall amount of tax, shortfall interest charges, plus a penalty of between 25-75% of the shortfall tax amount.  You could even be prosecuted, making it even more important to seek expert advice from your tax professional this tax time!

There are a number of opportunities available to legally minimise tax on cryptocurrency transactions. These include use of different operational structures, such as;

• Trusts – Discretionary or Unit Trust
• Private Company
• Partnership
• SMSF’s

There are also other opportunities involving negative gearing, and changes in tax treatments, which can save you tax.

Book an appointment with your tax professional to discuss how you can structure your affairs to minimise your tax liability.

Disclaimer

The material published electronically in this article is general in nature and does not constitute financial advice.  We do not guarantee that the information is complete or correct. We do not accept any responsibility for loss or damage suffered by any person or body relying directly or indirectly on any information contained within this site.

We do not accept any liability for any financial decisions made on the basis of the information provided. We recommend you seek professional advice, and take into account your particular investment objectives, financial situation and individual needs before proceeding with any financial decisions.