A beginner’s guide to tax on cryptocurrency in Australia
August 29, 2019
Cryptocurrency has become a popular alternative investment for many, yet investors who have sold the asset may not know they must declare it in their income tax return.
In the past, investors have mistaken Bitcoin, Ethereum, Ripple, Litecoin and other altcoins as currency for Australian tax purposes.
In fact, the Australian Taxation Office (ATO) classifies cryptocurrency as property, and as an asset when it comes to capital gains tax (CGT), similar to gold and silver.
Interestingly, the Currency Act divides currency into two types for the purposes of income tax:
- One is Australian currency
- The other is “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)”.
Therefore, cryptocurrency does not meet the definition of currency as it is not a monetary unit recognised and adopted by the laws of any other sovereign state.
This distinction can have a big impact on your financial position, especially as the ATO ramps up its efforts to track cryptocurrency trades and make sure people are paying the right amount of tax.
Here are the main tax considerations to remember for Australian cryptocurrency owners:
How is cryptocurrency taxed in Australia?
In Australia, cryptocurrencies are taxed when they are traded for goods and services, exchanged into fiat currencies like the Australian dollar, or cryptocurrency to cryptocurrency trades.
The gains or losses made from cryptocurrency are considered for income tax purposes and they can be treated as trading income or capital gains on investments depending on a number of factors.
Cryptocurrency for business or professional purposes
If you are investing in cryptocurrency for business purposes, such as commercial cryptocurrency mining or considered to be a trader – whether it’s personally, in a trust or company – then the profits are treated as revenue, all ‘buys’ are considered as purchases and ‘sells’ as income. At the end of the financial year, the cryptocurrency you are holding is considered to be trading stock.
Work example one: Charlie is considered to be a trader for income tax purposes and during his first financial year as a trader he purchases $500,000AUD in cryptocurrencies for a total transaction fee of $1,000AUD. Charlie sells half of the original purchases for $350,000AUD with transaction fees totalling of $1,000AUD
This would equate to the following profit and loss:
| $ | |
| Sales | 350,000 |
Purchases
|
(250,000) |
| Transaction fees ($1,000 + $1,000) | (2,000) |
| Profit | 98,000 |
Work example two: Freda is considered to be a trader for income tax purposes and during her first financial year she purchases $500,000AUD in cryptocurrencies with transaction fees of $1,000AUD and sells half of it for $200,000AUD in the same financial year with transaction fees of $1,000AUD. Freda’s only other taxable income is $100,000 for salary and wages with no other deductions.
| $ | |
| Sales | 200,000 |
Purchases
|
(250,000) |
| Transaction Fees ($1,000 + $1,000) | (2,000) |
| Loss | (52,000) |
| Salary and wages | 100,000 |
| Taxable income | 48,000 |
As Freda’s taxable income is less than $250,000, and assuming she meets the other non-commercial loss rules, she will be able to reduce her taxable income of $100,000 by the $52,000 from her cryptocurrency trading to $48,000.
Running a cryptocurrency-related business and business-related cryptocurrency transactions also fall under the income tax umbrella.
Cryptocurrency for personal purposes
Buying cryptocurrencies for the longer term for capital growth, mining as a hobby or just casually trading cryptocurrencies are subject to capital gains tax (CGT) rather than income tax.
A CGT event occurs when they sell or exchange their cryptocurrency, resulting in a capital gain or loss depending on how your investment performed.
If you sell your cryptocurrency at a higher price than what you paid for it, then you will have to pay tax on some or all of that gain, while a capital loss can be used to reduce capital gains made on other investments in the current or future years.
Work example three: Let’s say Charlie is now considered an investor. In year one, Charlie purchases $500,000AUD in cryptocurrencies with transaction fees of $1,000AUD. In year three, he sells half of his original purchase for $350,000 with transaction fees of $1,000AUD.
| Year three | $ |
Net sales proceeds
|
349,000 |
Less cost base
|
(251,000) |
| Gain | 98,000 |
| 50% discount, as held personally and longer than 12 months | (49,000) |
| Net capital gain | 49,000 |
Work example four: Freda is now considered to be an investor for income tax purposes and during year one she purchases $500,000AUD in cryptocurrencies with transaction fees of $1,000AUD and sells half of it for $200,000AUD in year three with transaction fees of $1,000AUD. Freda’s other taxable income is $100,000 and she has no more capital gains in year three.
| Year 3 | Year 3 |
Net sales proceeds
|
199,000 |
Less cost base
|
(251,000) |
| Capital loss | (52,000) |
| Taxable income | $100,000 |
As Freda has no other capital gains in year three, she will carry forward the capital loss of $52,000 to future years until she can apply it to future capital gains. Note, she cannot reduce her taxable income of $100,000 by capital losses. Rather, they are quarantined and can only be applied against future capital gains.
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 someone purchasing cryptocurrencies.
How to reduce tax related to cryptocurrency
Cryptocurrency investors can reduce their tax liabilities through the CGT discount and the personal use asset exemption, however there are strict conditions to follow.
Investors, either personally or via a trust, can gain a 50 per cent discount on capital gains if they hold onto their cryptocurrency for more than 12 months before trading or selling.
Some investors may not be subject to the CGT rules through the personal use asset exemption, although this only applies when cryptocurrency is used to buy goods or services for personal use and the gains you make from personal use assets are purchased for less than $10,000.
What happens to lost or stolen cryptocurrency?
Investors could be eligible for a capital loss if they lose their private key or have their cryptocurrency stolen, however it will depend on ownership evidence and other factors.
For tax purposes, an item is lost when it can’t be replaced. This is important for cryptocurrency private keys, which are irreplaceable codes used to access digital currencies.
In order to claim a capital loss on a lost private key, the ATO will need the following evidence:
- when you acquired and lost the private key
- the wallet address that the private key relates to
- the cost you incurred to acquire the lost or stolen cryptocurrency
- the amount of cryptocurrency in the wallet at the time of loss of private key
- that the wallet was controlled by you (for example, transactions linked to your identity)
- that you are in possession of the hardware that stores the wallet
- transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity.
What records are needed for tax purposes?
Cryptocurrency holders should keep transaction details such as dates, other parties and cryptocurrency values in Australian dollars for their records.
If you have a high volume of trades, it would be advisable to track your transactions via a cloud solution such as Coin Tracker, Sublime IP or something similar.
These records include receipts, exchange records, digital wallet records, records of agent, accountant and legal costs, and software costs.
Need help with your cryptocurrency investments?
Investors are wise to invest in cryptocurrency with care, as its tax treatment might have broader consequences to your financial position.
If you require tax advice before making the plunge into cryptocurrency or need help with your existing cryptocurrency investments, LDB has trusted experts who can help.
To find out more, call us on (03) 9875 2900 or fill out the form below to arrange a discussion with Florence Ioannou, our cryptocurrency tax specialist.
Article edited by Florence Ioannou, Senior Manager Accounting at LDB Group.
Other related articles by Florence Ioannou:
ATO announces cryptocurrency data matching program
How is cryptocurrency, like Bitcoin, treated for income tax in Australia?
Taxation on cryptocurrency in self-managed super funds (SMSFs)
How changes to GST affects Bitcoin and other cryptocurrency
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.