There is absolutely no doubt that the explosive growth of Bitcoin and other similar crypto-currencies in the market has been the financial fad of the last few years.
With explosive growth and periodic crashes, it’s been possible to make and lose substantial sums of money over startlingly short time periods and many inexperienced investors and speculators have been drawn into the net of this latest monetary craze.
When getting into crypto-currencies, or are already involved, consider the tax implications to trading and investing in these new digital products. Here’s a guide to taxing cryptocurrency.
Tax and cryptocurrency
If you buy cryptocurrency as an investment, Capital Gains Tax (CGT) will apply.
This is calculated based on the difference between the amount you paid for the cryptocurrency and the amount you disposed of it for. Any profit is subject to CGT, which can potentially be discounted by 50% if you hold your crypto asset for more than 12 months.
Your capital gain is worked out like this
- Deduct the cost base from the sale proceeds.
- The cost base is the price you paid for the cryptocurrency plus incidental costs.
- Next, take away any capital losses.
- Then discount the gain. Individuals are entitled to a 50% discount.
- The asset must have been held for 12 months or more for the discount to be available.
- The resulting figure is your net capital gain. This is subject to tax at your marginal rate
Disposal occurs when
- selling cryptocurrency for Australian dollars
- exchanging one cryptocurrency for another
- gifting cryptocurrency
- trading cryptocurrency
- using cryptocurrency to pay for goods or services
- In some cases, such as when you gift it, market value is substituted for proceeds.
Be careful though as Capital Gains Tax is not always relevant.
If you are acquiring the cryptocurrency to trade it, you might be deemed to be running a business of trading cryptocurrency, where you will pay income tax on the business profits (which is likely less advantageous than CGT, because the 50% CGT discount can’t apply).
What happens if I make a loss?
If your sale proceeds are less than your cost base, you will make a capital loss.
These losses can be offset against capital gains arising in the same year and to the extent they are not used up, they can be carried forward indefinitely until capital gains absorb them.
Capital losses can only be offset against capital gains and not any other form of income.
If you lose your coins, they are stolen or you are otherwise subject to fraud you may be able to claim the value of your losses as a capital loss.
The Personal Use Exemption
Some taxpayers might mistakenly think that you can buy up to $10,000 of cryptocurrency and avoid Capital Gains Tax by taking advantage of the personal use exemption.
This exemption applies where the cost of crypto doesn’t exceed $10,000 and is demonstrated that the crypto was to fund personal consumption,like a holiday, a car or a wedding.
Mistakenly relying on this exemption is one of the biggest reasons people fall foul of the ATO.
The taxpayer should expect to be asked to provide proof that they either did or intended to use their cryptocurrency to fund personal spending on goods and services.
Where the cost of your cryptocurrency assets exceeds $10,000, the personal use exemption will not be available and CGT will apply, whether the asset was for personal use or not.
If you buy and sell cryptocurrency on a regular basis with a view to making a profit, then the profits on disposal of the cryptocurrency will not be subject to CGT but will be assessable income since you will be regarded as a trader rather than an investor.
In effect, you’ll be regarded as being in business as a buyer/seller of cryptocurrency. It can be a fine line between being an investor and a trader.
If you are turning over your cryptocurrency every few days chasing profits, you have many transactions and you are running a business-like structure, you will be a trader.
Structure include a business plan, accounts and records of trading stock, business premises, licenses or qualifications, a registered business name and an Australian business number.
If you are holding the crypto with a view to long term gain, you are likely to be an investor.
Mark Chapman has over 25 years experience as a tax professional in both the UK and Australia, specialising in tax for individuals and SMEs. He is a fellow of the Institute of Chartered Accountants in England and Wales and CPA Australia and a member of the Chartered Institute of Taxation.