While the value proposition of a distributed ledger is driven by an immutable record of transactions, and a transaction setting with no central authority, the Australian Government has made it clear that anyone who dabbles or deals in cryptocurrencies – whether for personal or business transactions – must abide by the Australian tax laws.
Although the regulatory environment is still uncertain in terms of keeping up with advancing technologies and a lack of precedent, the Australian Tax Office (ATO) has laid out their guidelines for the tax treatment of crypto-currencies in Australia – specifically Bitcoin.
Furthermore, the AFR reports that the ATO have established a specialist task force to tackle cryptocurrency tax evasion, with the ATO auditing those people living beyond their reported income levels.
With tax-time just around the corner, the ATO will be on high alert for cryptocurrency activity, with penalties applying for non-disclosure.
While operating within a new and complex environment, the tax implications of cryptocurrency are viewed and applied under well-established Australian tax laws.
However, the provisions set out in the guidelines are specific and depend on whether you are supplying, acquiring, investing or speculating.
Furthermore, given the learnings, dynamic landscape and the solidifying of this ‘currency,’ there have already been amendments made to the provisions to try an overcome the blurry edges.
For example, pre-July 2017, for GST purposes, cryptocurrencies were treated as a form of barter, resulting in an elimination of GST input tax credits for purchases. Thankfully, this position has been resolved, such that some cryptocurrencies are now considered as a form of currency for GST purposes.
Although there may be benefits in getting on the Bitcoin bandwagon, if you are considering cryptocurrency, it’s important to understand the risks including high price volatility, an unregulated currency environment, along with the potential tax implications.
Prior to investing, it’s a good idea to talk to an advisor with experience in applying the cryptocurrency tax guidance, to ensure you are meeting your taxation requirements, or help you to apply for a Private Ruling for tax certainty.
There are also regulatory requirements that apply, particularly in the context of purchasing cryptocurrency through a SMSF. There are a number of critical regulatory and administrative issues that trustees of SMSFs should cover off on before investing in cryptocurrency.
To get you started, we will discuss the cryptocurrency tax implications of acquiring and disposing in personal transactions.
What you first need to know when it comes to taxing cryptocurrency, is that it’s not strictly treated as a currency. The tax treatment varies if the transaction was an investment, as part of business or, a personal asset.
The ATO’s view is that from an income tax perspective, cryptocurrency is not treated as a currency, however, from a GST perspective it is.
Even so, there has been no talk of the ATO changing their position and amending the treatment of cryptocurrencies for income tax.
Cryptocurrency transactions won’t incur GST
Sales and purchases of cryptocurrency are not subject to GST from 1 July 2017. This means that you do not charge GST on your sales of cryptocurrency and similarly, you are not entitled to GST credits for purchases of cryptocurrency. This treatment is the same for personal, business and investment transactions.
The underlying supply of goods or services will have its own GST implications – these don’t change by paying the consideration in cryptocurrency or any other currency.
Purchasing Private Goods and Services will not trigger income tax.
When it comes to personal transactions, generally, you will not trigger income tax liabilities if you only use cryptocurrency only to pay for personal goods and services and you are not doing business or carrying on an enterprise.
Cryptocurrency can come under the concept of a ‘personal use asset’, which applies to assets with a value of less than $10k that are purchased with the intention of personal use.
The value of cryptocurrency in Australian Dollars (AUD) will be the reasonable market value, which can be found at a reputable Bitcoin exchange (or equivalent for other cryptocurrencies).
In the cryptocurrency arena, this means that if you purchase some cryptocurrency with the intention of using to purchase personal items, any gains or losses you make will be ignored for tax purposes.
However, if your actual activity doesn’t reflect that ‘personal use’ intention, you might find that your gains become taxable.
The income tax outcome is quite different it you are dealing in cryptocurrencies as part of your business or investment activities.
Applying Capital Gains Tax
So, what type of owner of cryptocurrency are you?
- Traders buy and sell cryptocurrency regularly – akin to a share trader – incorporating a high level of investment (both time and money) and sophistication. Profits made by traders are likely to be treated as income, while losses will likely be tax deductible. Cryptocurrency held by traders are likely to be in the nature of trading stock, meaning that the trading stock valuation rules potentially apply to cryptocurrency held at the end of an income year.
- Speculators buy and sell cryptocurrency less regularly, but with the intention of making a profit on disposal. Profits made by speculators are likely to be treated as income, while losses may be tax deductible (although further advice may need to be sought depending on the circumstances). Cryptocurrency held by speculators generally will not be considered to be trading stock.
- Investors buy cryptocurrency to hold for the longer term. Investors may be able to access the 50% CGT discount if the investment is held for more than 12 months. Losses incurred will be considered to be capital losses, which can only be applied against capital gains.
As you can see, the cryptocurrency tax environment is complex.
This is where having different wallets might be useful – you might have a different wallet for personal use, versus investing, versus speculating. Having different wallets makes it easier to differentiate between intentions.
The most important thing to remember – whatever side of the coin – is to keep a record of all your transaction events.
This includes describing your intent for the transaction, the payment date of the transaction, the date, the amount in Australia dollars, what you did with it and who received it (including if you transfer between different types of cryptocurrency).
As the tax environment around transacting cryptocurrency continues to evolve, the main thing to remember is to disclose any cryptocurrency transactions to your advisor, and make sure you assess the risk involved and potential tax implications in how you trade.