Tax on digital currency

Are you one of the thousands of Australians investing and/or trading in cryptocurrency? If so, have you considered the tax implications?

As more and more people jump on the digital currency bandwagon it is important to understand how cryptocurrency transactions are taxed and the risks involved.

Firstly what is a cryptocurrency?

According to Wikipedia a cryptocurrency is "a digital asset designed to work as a medium of exchange. It uses cryptography to secure transactions, to control the creation of additional units and to verify the transfer of assets". The control of cryptocurrency is completely decentralised as opposed to a centralised banking system.

Beware of tax implications

The ATO is increasingly watching cryptocurrency transactions to ensure all taxes are being paid. It is important to understand how Australian tax law classifies cryptocurrency in order to feel confident about the tax implications for you personally. Bitcoin and other cryptos are not defined by the ATO as money or foreign currency for tax purposes. Instead, they are treated as assets for the purposes of calculating capital gains tax.

The ATO's treatment of cryptocurrencies varies depending on how you use them:

  • Personal transactions - if you simply pay for goods and services with cryptocurrency and those goods and services are for personal use and the cost of the transaction is $10,000 or less, there will be no income tax or GST implications
  • Investment - if you are holding cryptocurrency as an investment you will pay capital gains tax on any profits when you dispose of them
  • Trading - if you are trading cryptocurrency for profit, the profit will form part of your assessable income
  • Carrying on a business - if you are using bitcoins to pay for, or receive payment for, goods and services the transactions will be subject to GST
  • Mining - if you are mining cryptocurrency any profit you make will be included in your assessable income
  • Conducting an exchange - if you are buying and selling cryptocurrency as an exchange service you will pay income tax on the profits and transactions will be subject to GST

Whilst there is currently limited regulation in this area the ATO is increasingly using its powers to gather information from various sources to identify when people have unexplained wealth. For example, indications of a lifestyle that are mismatched with the reported level of income in a tax return. In addition, it is not only transactions of money transferred into your bank account i.e. income, that is noted. Transactions of money transferred from your bank account into a cryptocurrency exchange are also considered.

Other considerations

Further to the tax obligations of cryptocurrency you may also wish to consider how your holding is structured. For example, personally, in a trust or a self managed superannuation fund. Plus it is valuable to consider matters around estate planning for your holding such as updating your will to include your wishes for your holding should you pass away.

If you have questions about the tax implications or other matters of cryptocurrency trading be sure to seek guidance in advance of tax season. Will Sullivan, Senior Accountant at O'Briens, has an interest in this field and has developed an in-depth knowledge and expertise into the broader considerations of cryptocurrency. Will would be happy to assist you in your cryptocurrency related affairs ensuring you have peace of mind come tax time.

Contact Will on 03 8850 3333 or email will@obbc.com.au.

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