Cryptocurrency became part of our reality around 12 years ago and one of the main benefits of the system was the perceived anonymity of its users. However, following the transition of cryptocurrency into the mainstream, along with the potentially vast sums associated with the system, Governments around the world, including Australia, have hurried to put in place regulations to enable them to have an appropriate level of oversight.
In Australia, this began with an initiative launched by the Australian Taxation Office (ATO) in April 2019 which involved the ATO gaining access to cryptocurrency designated service providers (DSPs) which are used to identify the buyers and sellers of crypto-assets and quantify the transactions.
In June 2020, approximately 350,000 cryptocurrency investors started receiving letters from the ATO reminding them that the disposal of cryptocurrency can result in a capital gain. In addition to the warning being provided by the ATO to users of cryptocurrency in the text of these letters, this communication was a clear message to the taxpayer community that the ATO now has cryptocurrency user details. The time of cryptocurrency anonymity was largely over.
Whether you have been a regular trader of cryptocurrencies or if you have just made a one-off sale, it is likely you will start to see these details start to appear on your ATO pre-filling report when you log in to your personal myGov account.
Due to the increased attention from the ATO, it is now more important than ever to ensure you are meeting your income tax obligations when dealing in cryptocurrencies. To help you understand your obligations, we have outlined below various scenarios where you may have triggered a taxable event.
Is it a capital gain or income event?
The most basic step of understanding your cryptocurrency tax obligations is knowing what type of owner of cryptocurrency you are.
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 and so will not be subject to the trading stock revaluation rules.
Investors buy cryptocurrency with the intention of holding 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.
Disposing of one cryptocurrency to acquire another cryptocurrency is treated by the ATO as a taxable event. As there is no physical money being received in this type of exchange, the market value of the cryptocurrency you receive needs to be accounted for in Australian dollars. This will then be used to calculate your gain or loss on the sale.
If you cannot value the cryptocurrency you receive, the ATO accepts the capital proceeds from the disposal to be worked out using the market value of the cryptocurrency disposed of at the transaction date.
Airdrops vs chain-splits vs staking rewards. How do I correctly declare my income?
Airdrops occur when a type of cryptocurrency is performing a marketing event to mass-produce their cryptocurrency and sending it to users to start the coin in circulation and increase its market value. The ATO views this gain of coins as assessable income with the amount being equal to the market value of the cryptocurrency when received. In addition, the coin is then subject to CGT when sold, with the cost base being the market value when the coin was received.
Chain-splits, such as Bitcoin Cash being created from Bitcoin, occur when there are two or more competing versions of a blockchain that diverge. These are quite similar to a demerger in a listed company. If you owned pre-chain-split cryptocurrencies you will now own two separate cryptocurrencies once the split occurs.
There is no assessable income for the receipt of the new coin under a chain-split, and the cost base of this new coin is nil. You will account for any taxable gain or loss when the new coins are sold.
– Staking rewards
Forgers or miners (their more common name) receive assessable income for mining cryptocurrency. In addition to the mining income received, miners are also able to gain new cryptocurrency. While no taxable events occur in relation to the gaining of new cryptocurrency by miners, subsequent disposals of the new cryptocurrency are required to be brought to account for tax.
Purchasing Private Goods and Services may not trigger income tax
When it comes to personal transactions, generally, you will not trigger an income tax event if you only use cryptocurrency only to pay for personal goods and services and you are not doing business or carrying on an enterprise or otherwise considered to be investing in cryptocurrency with an intention of profit.
Cryptocurrency can be considered to be a ‘personal use asset’, which is a CGT exemption which applies to CGT assets with a value of less than $10,000 that are purchased with the intention of personal use.
In the cryptocurrency arena, this means that if you purchase up to $10,000 worth of cryptocurrency with the intention of using it to purchase personal items, any gains or losses you make will be ignored for CGT purposes.
However, if your actual activity does not reflect that ‘personal use’ intention, you might find that your gains become taxable.
In addition, it is worth noting that the personal use CGT exemption does not apply if it is considered that you hold cryptocurrency on income account, as opposed to capital account. This might be the case if you are regularly dealing in cryptocurrencies as part of your business or trading activities. In these circumstances, all relevant gains and losses should be brought to account for tax, as per usual, regardless of the amount invested.
Can I claim a deduction for losing my cryptocurrency?
Depending on whether you are a trader, speculator, or investor, you may be able to claim an income loss or capital loss if you lose your cryptocurrency private key or your cryptocurrency is stolen. Recently the ATO has become increasingly strict with their view of when cryptocurrency is considered to be lost or stolen. To claim a loss, taxpayers now have to provide substantive evidence which demonstrates that the cryptocurrency asset has truly been lost and is unable to be replaced.
What should you do next?
Cryptocurrency is becoming more widely accepted among society, which means the ATO will continue to focus on this area. To ensure you are staying on top of your reporting obligations, you should be keeping a detailed record of your transactions, including the underlying intent of the transaction (i.e., investment, private, trading) and be checking in with your tax advisor regularly or before you make any significant transactions to ensure you do not end up with an unforeseen tax bill.