Cryptocurrency is a growing focus of the ATO and it has determined cryptocurrency as a Capital Gains Tax (CGT) asset, as a rule. We’ve summed up the important details about cryptocurrency tax in Australia and noted them down below.
The information contained here should just serve as a guide for the ATO’s tax treatment of cryptocurrency. Given the fluid nature of cryptocurrency and consequently ATO’s evolving laws concerning it, it’s still best to contact a tax accountant who can give you accurate advice on your particular situation.
Learn more about CGT here, if you’re not that familiar with the subject. This post also talks about the types of CGT events. CGT for Cryptocurrency can be a complex subject and understanding CGT is vital to learning how cryptocurrency tax works.
CGT event for cryptocurrency
A CGT event can occur if you dispose of your cryptocurrency in any of the following:
- If you sell or gift cryptocurrency
- If you trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
- If you convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars, or
- If you use cryptocurrency to obtain goods or services.
Anytime you make a capital gain on the disposal of your cryptocurrency, the gain is taxable.
The only time a gain is not considered a CGT event is when the disposal occurred as part of a business you carry on or when the cryptocurrency is determined as a personal use asset.
The profits you make on a disposal of a cryptocurrency as part of a business transaction will be assessed as an ordinary income. Similarly, certain gains and losses from personal use assets are disregarded.
Disposal may be in part or full, and each cryptocurrency in a digital wallet, whatever type it may be, is treated as a separate CGT asset.
Trading with cryptocurrency
Remember that you generate a CGT event every time you trade cryptocurrency. In other words, if you dispose of your cryptocurrency, you lose a CGT asset, but then if you exchange it for another cryptocurrency, you gain back another CGT asset.
The market value of the new CGT asset you received should be accounted for in Australian dollars. If it cannot be valued, the capital gain from that disposal will be computed according to the market value of the cryptocurrency you disposed of. ATO gave this as an example.
For tax purposes, you should keep a record of every single trade you make because each one counts as a CGT event. You want to do this so capital losses in your trades can be offset against gains you made.
Cryptocurrency as a personal use asset
Cryptocurrency is treated as a personal use asset if it’s mainly used to purchase items for personal consumption.
Anytime you keep cryptocurrency with the intention of making a profit out of it, it becomes an investment. Likewise, if you use the cryptocurrency in the conduct of your business, it is no longer treated as a personal use asset.
The amount of the cryptocurrency, as well as the time of the disposal, are critical in determining whether it is a personal use asset or not.
You can own up to $10,000 worth of cryptocurrency for personal use, above that and it will be taxed. That means all capital gains you make on cryptocurrency acquired over $10,000 are considered CGT events.
And if the cryptocurrency is acquired and used within a short period of time, it is treated as a personal use asset.
If, on the other hand, the cryptocurrency is acquired and kept for a long time before it is used, or you only used a part of it, the ATO deems that as a non-personal use asset, even if you did use it to buy items for personal use. An example below.
In the case above, GCT is not applicable. However, if Michael acquired that cryptocurrency and waited a long time to buy a ticket or anything personal with it, it is no longer a personal use asset.
The burden of proving a transaction is personal is on you and you can be sure that the ATO will not accept verbal assurances that “it is for personal use.”
Cryptocurrency is also not a personal use asset when:
- it is exchanged to Australian dollars or traded to a different cryptocurrency to pay for personal purchases
- a payment gateway is used to pay for the purchases rather than using the cryptocurrency directly
But again, the time factor is important in determining whether a cryptocurrency is a personal asset or not. Consider the example below.
Cryptocurrency held as an investment
Cryptocurrency held as an investment is not entitled to the personal use asset exemption. Any capital gain on cryptocurrency held as an investment is taxable.
There is a capital gain if the proceeds from the disposal of the cryptocurrency exceed its cost base.
There is no capital gain when the market value of your cryptocurrency changes. Gains—and loss, for that matter, are only made when you dispose of your cryptocurrency assets.
To be eligible for a CGT discount and reduce a capital gain, you must have had your cryptocurrency for 12 months or more at the time of disposal.
You can also reduce a capital gain you may make at a later year if you have a net capital loss.
A net capital loss cannot be deducted from other income. Keep in mind that cryptocurrency is primarily a CGT asset. That said, you only make a capital gain or capital loss on it, and a capital loss can only be offset against a capital gain; not from other income.
Claiming capital loss for lost or stolen cryptocurrency
You may claim a capital loss in the event of the following:
- your cryptocurrency was stolen
- you have lost evidence of ownership of your cryptocurrency
- you have lost your private key and access to your cryptocurrency
To claim a loss, you should provide the following evidence:
- when you acquired and lost the private key
- the wallet address that the private key relates to
- the cost you incurred to acquire the lost or stolen cryptocurrency
- the amount of cryptocurrency in the wallet at the time of loss of private key
- that the wallet was controlled by you (for example, transactions linked to your identity)
- that you are in possession of the hardware that stores the wallet
- transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity.
CGT on chain split
A chain split occurs when the core rules of two or more co-existing blockchains—or blockchains with a shared history—separate.
A permanent chain split of competing versions of a blockchain can be:
- an old and a new blockchain co-existing
- an old and a new cryptocurrency co-existing on their respective blockchains
Cryptocurrency held as an investment
For cryptocurrency held as an investment, no gain— either ordinary income or capital, is made when you receive a new cryptocurrency as a result of a chain split.
Again, you only make a capital gain when you dispose of a cryptocurrency. And when you dispose of that new cryptocurrency created by the chain split, the cost base is always zero. To illustrate:
If you don’t dispose of that new cryptocurrency for at least 12 months, you may be entitled to a CGT discount.
Cryptocurrency held in a business you carry on
For cryptocurrency held in a business you carry on, any new cryptocurrency you receive due to a chain split is treated as a trading stock held for sale or exchange in the conduct of business. This new cryptocurrency must be brought to account at the end of the income year.
Capital gains tax, in itself, is a pretty challenging subject and ATO’s rules on cryptocurrency is not exactly as simple as ABC. But it’s always a good idea to pay your taxes right and get in the good graces of the ATO.
So if working out your capital gains, losses, and taxes for each transaction you make or maintaining a veracious record of all your trades are becoming troublesome, it may be time to consider the wisdom of getting a professional accountant to help you with the job.
Contact Chan and Naylor today and save you or your company not just precious time but also from costly mistakes.
Aside from tax assistance, have a look at our other accounting and advisory services designed to help you achieve greater financial success.
If you like this post, “Guide to ATO’s Capital Gains Tax on Cryptocurrency”, subscribe to our newsletter and stay in touch with us by liking our main Chan & Naylor Facebook page, the Chan & Naylor South West Sydney Facebook page, as well as our Linkedin, Instagram, and Twitter pages.
The Chan & Naylor Group has national offices in South West Sydney, Sydney, Pymble and Parramatta in New South Wales, Wheelers Hill, Melbourne, Moonee Ponds and Hawthorn in Victoria, Brisbane and Capalaba in Queensland, and East Perth in Western Australia that can assist you with your accounting needs. Contact us here today.
The material on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs. Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this website are provided for illustrative purposes only.
Although every effort has been made to verify the accuracy of the information contained on this website, lnfocus, its officers, representatives, employees and agents disclaim all liability [except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this website or any loss or damage suffered by any person directly or indirectly through relying on this information.