Tax treatment of cryptocurrencies – How the ATO deals with it.
The term cryptocurrency is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain. Cryptocurrency generally operates independently of a central bank, central authority or government.
The creation, trade and use of cryptocurrency is rapidly evolving. This information is our current view of the income tax implications of common transactions involving cryptocurrency. Any reference to ‘cryptocurrency’ in this guidance refers to Bitcoin, or other crypto or digital currencies that have similar characteristics as Bitcoin.
If you are involved in acquiring or disposing of cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances. Everybody involved in acquiring or disposing of cryptocurrency needs to keep records in relation to their cryptocurrency transactions.
If you have dealt with a foreign exchange or cryptocurrency there may also be taxation consequences for your transactions in the foreign country.
1. Transacting with cryptocurrency
A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal can occur when you:
- sell or gift cryptocurrency
- trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
- convert cryptocurrency to fiat currency (a currency established by government regulation or law ), such as Australian dollars, or
- use cryptocurrency to obtain goods or services.
If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded. If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.
While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.
2. Exchanging cryptocurrency for another cryptocurrency
If you dispose of one cryptocurrency to acquire another cryptocurrency, you dispose of one CGT asset and acquire another CGT asset. Because you receive property instead of money in return for your cryptocurrency, the market value of the cryptocurrency you receive needs to be accounted for in Australian dollars. If the cryptocurrency you received can’t be valued, the capital proceeds from the disposal are worked out using the market value of the cryptocurrency you disposed of at the time of the transaction.
3. Record keeping for cryptocurrency
It is vital to keep good records for all your transactions with cryptocurrency, whether you are using cryptocurrency as an investment, for personal use or in business. You need to keep the following records in relation to your cryptocurrency transactions:
- the date of the transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).
The sorts of records you should keep include:
- receipts of purchase or transfer of cryptocurrency
- exchange records
- records of agent, accountant and legal costs
- digital wallet records and keys
- software costs related to managing your tax affairs
Keeping good records will make it easier to calculate and meet your tax obligations, and if you are in business, they will assist you to manage your cash flow and see how your business is doing. You can use an accountant or third-party software to help meet your record-keeping obligations and working out your tax.
4. Cryptocurrency businesses
If you hold cryptocurrency for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.
Examples of businesses that involve cryptocurrency include:
- cryptocurrency trading businesses
- cryptocurrency mining businesses
- cryptocurrency exchange businesses (including ATMs).
Not all people acquiring and disposing of cryptocurrency will be carrying on businesses. To be carrying on business, you will usually:
- carry on your activity for commercial reasons and in a commercially viable way
- undertake activities in a business-like manner – this would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan
- prepare accounting records and market a business name or product
- intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term.
There is also usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.
Whether you are carrying on a business and when the business commences are important pieces of information. If you’re still setting up or preparing to go into business, you might not yet have started the business.Money received (or property received) prior to a business being carried on is not generally assessable income. Likewise, you can’t claim deductions incurred prior to the business being carried on.
Example 1
Sachin is in the business of trading cryptocurrency. On 15 December 2017, he purchases 1,500 Coin A for $150,000. On the same day, he sells 1,000 Coin A for $200,000. As Sachin holds the cryptocurrency for sale or exchange in the ordinary course of his business, Sachin can claim a deduction for $150,000 for the acquisition for Coin A and declares income of $200,000 for the later sale of Coin A.
5. Using cryptocurrency for business transactions
If you are carrying on a business that is not a cryptocurrency business, but use cryptocurrency in your activities you need to account for cryptocurrency as you would for other assets or items used in your business.If you receive cryptocurrency for goods or services you provide as part of your business, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income. This is the same process as receiving any other non-cash consideration under a barter transaction. One way of determining the value in Australian dollars is the fair market value which can be obtained from a reputable cryptocurrency exchange.
Where you purchase business items using cryptocurrency (including trading stock) you are entitled to a deduction based on the market value of the item acquired.
For further information you can access the Federal Government Smart Money website here
https://moneysmart.gov.au/investment-warnings/cryptocurrencies-and-icos
Source: ATO 27 July 2021
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