Bitcoin and other forms of cryptocurrency are historically not regulated by a central bank or a government. In recent years, however, governments around the world, Australia included, started regulating digital currency. The Australian Taxation Office has started applying taxation laws to cryptocurrency.
Below is a summary of important details on how the ATO today handles cryptocurrency— particularly bitcoin and other cryptocurrencies with similar features as bitcoin.
Keep in mind that cryptocurrency uses a still largely evolving technology. As such, the ATO’s rules and regulations concerning it are also continually changing.
That said, use this as a guide only and contact a tax accountant if you need help with your cryptocurrency tax so you may receive appropriate advice on your unique situation. Implementing tax planning strategies with an accountant will also help you minimise your tax liabilities.
If you are in a business that uses cryptocurrency in transactions, the trading rules apply rather than the Capital Gains Tax rules. Read here to learn more about CGT events for cryptocurrency.
What is cryptocurrency
Cryptocurrency is a digital asset that can be used as payments for good and services or traded for profit. You can buy, sell, hold, send, and receive cryptocurrency via a digital wallet.
It uses an incorruptible technology called blockchain. Blockchain is like another Internet, except digital information can only be distributed and not copied.
Examples of cryptocurrency are bitcoin, ethereum, and litecoin among others. The most popular is bitcoin and it is where the ATO’s cryptocurrency business tax guidelines apply to.
From the ATO’s views, bitcoin—and other cryptocurrency for that matter — is not money or legal tender and is not a foreign currency.
As early as 2014, businesses worldwide have started accepting bitcoin as a mode of payment for goods and services. In Australia, the use of cryptocurrency in business has also become a practice and the ATO acknowledges this.
If you accept cryptocurrency as payments in the ordinary conduct of your business, or if you are carrying on a business of buying and selling cryptocurrency, the trading stock rules apply. This means that your cryptocurrency is taxed as income and the cost by which you acquired it is deductible.
Entities using cryptocurrency in business include:
- cryptocurrency trading businesses
- cryptocurrency mining businesses
- cryptocurrency exchange businesses (including ATMs)
Not all businesses acquiring and disposing of cryptocurrency is considered a cryptocurrency business. For your cryptocurrency profit to fall under ordinary income and your expenses to be deductible, you typically do the following:
- 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
Additionally, although one-off transactions are counted in some cases, the ATO also looks for some repetition and regularity in your business activities in determining whether your cryptocurrency should be taxed as income.
Critical to this is the date you established your business as it appears on records. Money or property received prior to the date you established your business will not be treated as income, which also means you cannot claim deductions on it.
The same rules for income and deductions that the ATO used for non-cryptocurrency businesses can be used. Take a look at the example below.
Using cryptocurrency in your business transactions
If you’re not in the cryptocurrency business but you use cryptocurrency in the conduct of your business, accounting for your cryptocurrency assets is the same as that of other assets or items you use in your business.
The value of the cryptocurrency you received in exchange for your services or goods should be accounted for in Australian dollars as part of your ordinary income.
To determine the value in Australian dollars, refer to a reputable cryptocurrency exchange for the current market value of cryptocurrency at the time of the acquisition.
Profits on isolated or series of cryptocurrency transactions
Because cryptocurrency is generally treated as Capital Gains Tax by the ATO, if you invest in cryptocurrency with the hope of making a profit out of it, any gain you make upon disposal is treated as a capital gain.
However, there are situations where cryptocurrency transactions give rise to ordinary income. Isolated or series of cryptocurrency transactions can be treated as income if:
- you entered into the transaction with a purpose or intention of making a profit, and
- the transaction is part of a business operation or commercial in character.
The ATO determines a cryptocurrency transaction is not a CGT event but an income deductible transaction according to the following:
- the nature of the entity undertaking the transaction
- the nature and scale of other activities undertaken by the entity
- the amount of money involved and the scale of the profit sought or obtained
- the nature, scale and complexity of the transaction
- the length of time over which the transaction occurs
- whether the property, in this case the cryptocurrency, had any other use other than as an object of trade (for example, is it used as a medium of exchange or to buy services only available on the blockchain)
The facts and circumstances surrounding your case will ultimately determine if the cryptocurrency transaction has a profit-making intention and business or commercial character.
You should always consult a professional tax accountant if you are ever in doubt. Blockchain is immutable and transaction records live there forever. You don’t want to cause problems with the ATO down the line.
Here is an example given by the ATO.
Using cryptocurrency for salary and wages
In cases where instead of Australian dollars, cryptocurrency is given as a form of salary, the cryptocurrency payment becomes a fringe benefit and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act 1986.
The benefit will be a property benefit and the value will be established at the time it is given.
Take note that a valid salary sacrifice agreement must be presented. Otherwise, the cryptocurrency paid as a salary will be treated as a normal salary and the employer has to meet the Pay As You Go (PAYG) obligations using the current market value of the cryptocurrency in Australian dollars.
The rules governing bitcoin tax in Australia can be daunting, but non-compliance, whether in bitcoin or not, is not an option. So if you need a business tax accountant to work out your taxes for cryptocurrency in business or just calculate business tax for you, go get one! It will be the best decision you’ll make this tax season.
Do you need tax accountants for you and your business? Contact a Chan & Naylor representative today! We’re here to help!
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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.
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