Myth 1: Cryptocurrency is a currency for tax purposes
Contrary to popular belief, cryptocurrency is not deemed a currency for tax purposes within Australia.
The Australian Taxation Office (ATO) recognises cryptocurrencies as digital assets. This means they are subject to the same capital gains or ordinary income that, for example, shares fall into.
The Australia’s Currency Act (1965) divides currency into two types:
- Australian currency; and
- “every currency that is recognised and adopted by the laws of any other sovereign state as the monetary unit and means of discharging monetary obligations for all transactions and payments in the respective sovereign state (that is, foreign currency)”.
Until recently, cryptocurrency did not meet the definition of currency as it was not a monetary unit recognised and adopted by the laws of any other sovereign state.
However, we await the regulatory response to El Salvador officially adopting Bitcoin as legal tender from September 7, 2021.
As such, if you are holding cryptocurrency as an investment, you will pay capital gains tax (CGT) on any profits when you dispose of them. If you hold them personally, in a partnership or trust for more than 12 months, you may be entitled to the 50 per cent general CGT discount.
Alternatively, if you make a loss when you dispose of your cryptocurrency this can be offset against other capital gains you made during the financial year or carried forward to future years where it may be used against future gains.
If you are actively trading cryptocurrencies for profit, as opposed to holding them for investment, the profit or loss will form part of your assessable income. The profit or loss is determined at the time of disposal.
If you are unsure if you would be considered a trader or investor, please refer to our article ‘Share trader or investor – what’s the difference?’ as the concepts in this article can be applied to these circumstances. You may also like to read our article on tax for cryptocurrency in Australia for more information and some worked examples.
Myth 2: Tax is only payable when withdrawing your money back to fiat (AUD$)
There’s a misconception circulating that have people believing that no tax is paid until you eventually sell your cryptocurrency back to fiat – for example, Australian dollars. Note that the definition of fiat money is inconvertible paper money made legal tender by a government decree.
As previously mentioned, cryptocurrencies are considered digital assets, which means any crypto-to-crypto transaction is a taxable event.
For example, if you purchase Altcoins with Bitcoin the ATO considers you to have triggered a deemed disposal on either capital gains or ordinary income as you have technically disposed of the Bitcoin. In this example if you were considered an investor, the CGT event is calculated as the value of the Bitcoin when you purchased the Altcoin, less the original purchase price of that Bitcoin.
In this instance, the ATO will apply foreign currency tax rules to calculate the gain or loss on the transfer from Bitcoin to Altcoin. It would be reasonable to assume that if you purchased the Bitcoin in order to acquire the Altcoin then the gain or loss will be minimal.
It should be noted that transferring cryptocurrency from one wallet to another wallet is not considered a deemed disposal of cryptocurrency for tax purposes as the taxpayer maintains ownership of the coin/token.
Myth 3: Cryptocurrency under $10,000 are not taxable – personal use asset rule
This rule only pertains to rare situations because the ATO considers cryptocurrency as a non-personal use asset if it is kept or used mainly:
- as an investment
- as part of a profit-making scheme, or
- in the course of continuing a business.
As such, the $10,000 personal use asset can only be used in rare instances when cryptocurrency is purchased and immediately disposed of to purchase personal goods or services.
Conversely, if you purchased personal goods or services with cryptocurrency that you have held with the original intent to hold it as an investment or trading, then it would trigger a taxable event either on capital or ordinary income.
Myth 4: Cryptocurrency as a hobby is not taxable
There are private rulings that indicate the ATO will regard Bitcoin acquired in the early stages of its evolution as a personal use asset where it is demonstrated the taxpayer acquired the Bitcoin out of personal technological interest rather than a profit-making intention.
In these circumstances, the acquisition of bitcoin was accepted to be more in the nature of a hobby and therefore treated as a ‘personal use asset’.
Given quick growth of the digital currency market and the surge in value invested in cryptocurrency, one would expect it would be rather challenging to persuade the commissioner that holdings of cryptocurrency were obtained through a hobby.
Myth 5: Cryptocurrency transactions cannot be tracked by the ATO
Cryptocurrency designated service providers must comply with anti-money laundering laws, which means data on these exchanges are sent to the ATO.
The ATO cryptocurrency data-matching program has been running since April 2019.
The ATO now collects data from Designated Service Providers (DSPs) to identify individuals or entities that may have purchased, sold or transferred cryptocurrency.
The data obtained will be used to identify the buyers and sellers of crypto-assets and quantify the related transactions.
It should also be noted that the ATO has the power to conduct a review and/or audit if they suspect unusual activity. If you choose not to cooperate with the ATO, they have the power to issue an amended assessment with an estimate of your taxable income based on their estimate of what is reasonable.
If you receive such an assessment, the burden of proof falls on you to prove that it is incorrect. Therefore, it is important to keep clear records of what you have purchased, on what exchange, the date of purchase, price of purchase, and if it was for personal use, investment or trading, as this will help determine your intentions and relevant amounts if ever questioned.
Myth 6: Gifting cryptocurrency is not taxable
Giving cryptocurrency as a gift, even if you do not receive payment for it, is still considered a disposal due to the underlying intent of holding the cryptocurrency in the first instance. As such, it is subject to capital gains tax or ordinary income.
For those on the receiving end, tax does not need to be paid when you accept the cryptocurrency, however if you discard it, then capital gains tax will be applied.
Need advice relating to cryptocurrency?
Are you interested in adding cryptocurrency to your investment portfolio or do you have questions about how it affects your tax status?
LDB Group can offer advice, including guidance on tax for cryptocurrency in Australia, how it is treated for income tax, and how they are taxed in self-managed super funds.
To find out more, give us a call on (03) 9875 2900 or send us a message via the contact form below.
Disclaimer: Please note that the above information is general advice only and conditions may vary depending on an individual’s circumstances. This article should not be used as a substitute for competent professional advice from a suitably qualified professional and, as such, we advise you seek professional advice to obtain an accurate assessment. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. You alone are solely responsible for determining whether any investment, asset or strategy or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult a suitably qualified professional regarding your specific legal, tax, financial or investment situation.
