Understanding the taxation implications of Cryptocurrency

There’s no doubt that the last few years has seen a significant increase in the number of clients investing in the various forms of cryptocurrency.

But while the number of crypto investors has been steadily increasing, confusion remains regarding how cryptocurrency is taxed. As with most things tax related, the answer is “it depends”.

This article is not meant to be a definitive guide to the tax implications surrounding cryptocurrencies. However, it is intended as a high-level overview of the tax treatment to provide a sound understanding of the main tax implications around buying and selling cryptocurrencies.

What is cryptocurrency?

The ATO defines cryptocurrency as “a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain”.

If that sounds a little too technical, another way to describe it is “a digital currency that operates independently of a central bank, central authority or government”.

How is cryptocurrency taxed?

There is differing tax treatment depending on whether you:

• Invest in cryptocurrency for the purposes of making a gain through price appreciation
  

• Use your cryptocurrency as a personal use asset
  

• Trade cryptocurrency with the purpose of profiting from price fluctuations
  

• Mine cryptocurrency
  

Crypto Investor:

It is my experience that most people purchase cryptocurrency with the intention of later selling it for a higher price. In this regard, cryptocurrency has similar taxation implications to buying property or shares.

In this case, the appreciation in the value of the asset is taken to be a capital gain. This means that the sale proceeds are applied against the acquisition cost, to derive the overall capital gain. The capital gain is then taxed at the applicable tax rate for the entity that owned the investment, noting that individuals are subject to a 50% reduction in the capital gain declared if the investment is held for more than one year.

If however your disposal results in a capital loss, this loss is quarantined and unable to be applied against other income such as salary and wages, but is able to offset future capital gains.

For investors, you generally need to declare the capital gain or loss when you trigger a disposal. Generally, a disposal would occur in the following circumstances:

• You sell all or part of your crypto,
  

• You exchange the original crypto for another cryptocurrency (i.e. trade Bitcoin for Ethereum),
  

• You spend the crypto, I.e. such as using crypto to buy groceries (noting the potential Personal Use exemption discussed below), or
  

• You gift crypto to someone else

Personal use:

Where your cryptocurrency use is more akin to normal cash, used to purchase everyday items, and has a cost base of $10,000 or less, the ATO provides an exemption for “personal use” assets.

In this case, a capital gain is not required to be reported, however, any capital losses made are also not reported.

I see many people think that this is an automatic loophole, and that crypto worth less than $10,000 is automatically tax free. This is certainly not the case as most people are not using crypto for their everyday purchases.

Crypto traders:

For those that are purchasing cryptocurrency regularly, in a business like manner, to take advantage of volatility to make a profit, the tax treatment is likened to that of a share trader, where the sale proceeds are reduced by the purchase costs, to arrive at the profit. This profit is then taxed at the applicable tax rate for the cryptocurrency owner.

Traders do not receive the 50% discount for investments held for more than one year as they are deemed to be operating a business rather than investing. However, as a business, they may be eligible for other tax benefits such as the current accelerated depreciation concessions. Additionally, if you find yourself as a crypto trader, some tax planning strategies may open up such as investing through a company to take advantage of the current 25% tax rate for Small Business companies.

Crypto Miners:

Mining is the concept of creating new crypto. This is generally achieved by solving complex computational problems.

The tax implications for miners is more complex:

• If you are deemed to be a “hobby” miner, you have created a CGT asset. The creation of a CGT asset does not result in a taxable event, but a capital gain or loss is calculated when a disposal occurs.
  

• If you are in the business of mining crypto, you are essentially holding ‘trading stock’ and taxed similarly to a crypto trader.

Record keeping requirements:

Similar to other investments, the ATO requires the following records to be kept:

• Acquisition documentation, showing date of purchases, units purchased, value of purchases etc.
  

• Sale documentation, including sale price, number of units sold and date sold
  

• The value of the cryptocurrency in Australian dollars at the time of each transaction

As we move to a more digital world and a digital economy, new asset classes continue to be created regularly. As a relatively new asset class, we expect that the ATO’s position on the taxation of cryptocurrencies will continue to evolve.