Due to the worldwide explosion of the cryptocurrency market it is only natural that the Australian Taxation Office (ATO) is keeping a watchful eye on the market. The ATO has recently released a guidance statement of how they view cryptocurrencies and have also created a specialist task force to focus on cryptocurrency tax evasion.
As the cryptocurrency market is highly volatile and has increased immensely over the last year it is important to understand your taxation obligations. Below Bourne + Weir will help to clarify areas of concern in relation to the taxation of cryptocurrencies:
What is Cryptocurrency?
A cryptocurrency is defined as a digital currency whose transactions are secured through encryption. A defining feature of cryptocurrency is that it is decentralised and is not issued by any government authority. The most commonly traded cryptocurrencies at present are Bitcoin and Ethereum.
The Commissioner has currently defined cryptocurrencies as ‘holding rights that amount to property. Thus, it is deemed to be a capital gains tax (CGT) asset under subsection 108-5(1)(a) of the ITAA 1997 and is in accordance with TD2014/16 ‘Is Bitcoin a ‘CGT asset’?’
Taxation of Cryptocurrencies
If your cryptocurrencies are held for the purpose of personal use of consumption and the purchase cost was $10,000 or less then any capital gain is disregarded under subsection 108-20(1). The ATO has very strict guidelines on what is defined as a personal use asset. The example given in TD 2014/16 are as follows:
An individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example clothing or music. If the bitcoin were instead purchased to facilitate the purchase of income producing investments, they would not be personal use assets.
If you have acquired cryptocurrencies as an investment and not as a part of a business, it will generally be assessable as a capital gain or loss. Where the investment is held individually or under a Trust entity for longer than 12 months then a 50% discount can be applied to the capital gain. Any capital losses can be carried forward to be utilised against future capital gains.
For taxpayers that trade cryptocurrencies in a business-like manner any cryptocurrency may be considered as trading stock. any profit will be treated as assessable income and not on capital account. Costs incurred in purchasing cryptocurrencies will be deductible including any other associated expenditure. In determining if you are in the business of cryptocurrency trading, the ATO will consider the following factors:
- The nature of the activities and whether they have a profit making purpose
- The complexity and magnitude of the undertaking
- The volume of operations and the amount of capital employed
- Repetition and regularity in the buying and selling of shares
- Whether the taxpayer is operating to a plan, setting budgets and targets, keeping records (operating in a business-like manner) and the degree of sophistication
- The turnover involved
- Whether the taxpayer is engaged in another full-time profession.
Although the cryptocurrency market is a new and lucrative environment you should consider you tax obligations.
Bourne + Weir can assist you in navigating the tax implications of cryptocurrencies or any other taxation matters. Should you require any further information please call the office on (03) 9629 1433.