Tax on Cryptocurrency
If you are one of the hundreds of thousands of Australians trading in digital currency it is critical that you are aware of the tax implications. The ATO have made it very clear that cryptocurrency will be under the microscope this tax season so it is important to understand your obligations.
What is cryptocurrency?
Cryptocurrency is defined as a digital currency in which transactions are verified and records maintained by a decentralised system using cryptography, rather than by a centralised authority. The ATO defines it as “a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain”. Cryptocurrency generally operates independently of a central bank, central authority or government.
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 cryptocurrencies 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 (CGT).
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 bitcoin 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.
Importance of record-keeping
The importance of keeping comprehensive records cannot be understated whether you are using cryptocurrency as an investment, for personal use or in business. Keeping accurate records will make it easier to calculate and meet your tax obligations, and if you are in business, they will assist you to manage your cash flow. Keep a good record of:
- receipts of purchase or transfer of cryptocurrency
- gains and losses
- transaction dates
- Australian dollar value at the time of the transaction
- what the transactions were for
- digital wallet records and keys.
Seek help from a specialist
The ATO has indicated it will be prompting taxpayers to review previously lodged returns and to report cryptocurrency capital gains and losses as they lodge their 2021 tax return. Cryptocurrency can be complicated with fluctuating values and differences in categorisation often making it confusing.
If you are unsure about the accuracy of past returns and/or your transactions are becoming more complex you may wish to consider seeking some specialist advice.
O’Brien Senior Advisor, Will Sullivan, takes a personal interest in digital currency, is a specialist in cryptocurrency taxation and has an in-depth knowledge of the broader considerations in this field. Will has successfully assisted clients with complex matters in this area and is also the leader in education on this topic for the rest of our team. If you would like to understand further how Will can assist you in achieving the best outcomes and ensuring you have peace of mind regarding your cryptocurrency tax obligations, please contact us.