The Basics
Cryptocurrency has become a popular investment and investors are seeing it as a viable addition to their portfolios.
I have had several inquiries regarding the tax treatment of cryptocurrency. Bear in mind that this guide does not constitute formal tax or investment advice.
You should always research further and consult with a professional where possible so the best strategy can be put in place in accordance with your personal financial objectives.
This is a short guide highlighting some of the most important points and considerations when investing in or purchasing a crypto currency. We are not going to look at cryptocurrency held in a business you carry on (this is a whole different ball game) but held as a personal investment or personal use asset.
Simply put, the ATO views cryptocurrency in the same light it would view the FOREX trading of fiat money (i.e. paper money), the only difference is that we cannot touch it. If you are involved in the buying or selling of cryptocurrency, you need to be aware of the tax consequence. These do vary depending on your circumstances.
If you are planning on investing in cryptocurrencies here is some useful information on the risk involved in investing in cryptocurrencies
Remember: If it sounds too good to be true, it is too good to be true.
Determine why you are holding the cryptocurrency
We need to differentiate between cryptocurrency held as a personal use asset and as an investment.
Cryptocurrency as an investment
- If you hold cryptocurrency as an investment you may have to pay tax on any capital gain you make on disposal of the cryptocurrency.
- If you hold the cryptocurrency as an investment, you will not be entitled to the personal use asset exemption
- If you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.
Cryptocurrency as a personal use asset
- Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption.
- Where cryptocurrency is acquired and used within a short period of time, to acquire items for personal use or consumption, the cryptocurrency is more likely to be a personal use asset.
- Where the cryptocurrency is acquired and held for some time before any such transactions are made, or only a small proportion of the cryptocurrency acquired is used to make such transactions, it is less likely that the cryptocurrency is a personal use asset. In those situations, the cryptocurrency is more likely to be held for some other purpose.
The relevant time for working out if an asset is a personal use asset is at the time of its disposal.
Disposal, what does it mean?
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A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal occurs when you:
- sell or gift it
- trade or exchange it. This includes the disposal of one currency for another currency.
- convert it to cash (fiat money e.g., Australian Dollars)
Transacting with cryptocurrency
The most important transaction to consider is the trading or exchanging of one cryptocurrency for another.
- You exchange one GCT asset for another.
- Because you receive property instead of money the market value of the cryptocurrency you receive needs to be accounted for in Australian Dollars.
- You will also need to know the market value (in Australian dollars) of the original cryptocurrency you purchased on the date you purchased
EXAMPLE
On 5 July 2017, Katrina acquired 100 Coin A for $15,000. On 15 November 2017, through a reputable digital currency exchange,
Katrina exchanged 20 of Coin A for 100 of Coin B.
Using the exchange rates on the reputable digital currency exchange at the time of the transaction, the market value of 100 Coin B was $6,000.
For the purposes of working out Katrina’s capital gain for her disposal of Coin A,
her capital proceeds are $6,000.
Record keeping
You must keep records of each cryptocurrency transaction to work out whether you have a made a capital gain or loss from each CGT event.
ATO Data Matching
Currently the ATO has limited data on the level of cryptocurrency investments and transactions made by Australian taxpayers as there are limited obligations for taxpayers and third parties to provide this information. However, the ATO is looking to obtain data from designated service providers (DSP’s). This data will be used to identify the buyers and sellers of crypto-assets. This data will then be matched against ATO records to identify individuals who may not be meeting their reporting obligations.
Source ATO Data Matching protocol – CRYPTOCURRENCY: 2014–15 to 2019–20 financial years data matching program protocol | Australian Taxation Office (ato.gov.au)