Cryptocurrency is becoming more and more mainstream, with now approximately 1 in 5 Australian adults owning cryptocurrency. It is important to realise that acquiring Cryptocurrency has tax implications. The Australian Taxation Office treats the purchase and sale of Cryptocurrency similarly to other investments. If you are generating income from the investments, you will be taxed on that income.
As cryptocurrency is a relatively new asset class, the tax return process can appear to be difficult to navigate. This is especially the case with Cryptocurrency where the individual is making many transactions, often from the convenience of their phone. It is therefore important to be organised and to carefully document your transactions. Often the help of online tracking software is needed to keep the necessary records, where you are making many transactions.
Those with cryptocurrency fall under three broad categories for tax purposes – as an investor, as a trader, or those using cryptocurrency for a personal use asset. The Taxation Office provide guidelines on these three classifications.
The majority of those acquiring cryptocurrency will fall under the investor category, whereby they hold the asset with the hope of future growth in the asset. If there is an intention to grow wealth and make gains, the Taxation Office will consider them to be an investor.
Cryptocurrency investors are taxed under Capital Gains Tax regime. Whereby they pay tax when the asset is sold. Investors are entitled to the 50% Capital Gains Tax discount if the cryptocurrency sold was held for more 12 months. Cryptocurrency investors who make a loss are restricted to applying that loss only against future capital gains.
A common misconception with cryptocurrency is that it is only taxed when a coin is sold for AUD (or other Government backed currency). However, a capital gain is also made where one cryptocurrency is sold for another cryptocurrency, selling Coin A for Coin B. Even though there has been no sale back to Australian dollars, the sale will still be taxed. Furthermore, in the same way that gifts of shares are taxable when gifted, the same applies with gifting cryptocurrency – they are taxed when gifted.
Cryptocurrency traders are those who apply a commercial approach to the buying and selling of cryptocurrency, which represents a form of income rather than as a capital gain. Someone will be considered a cryptocurrency trader if their activities are commercial in character, and they are undertaking the trading of cryptocurrency in a businesslike manner.
As a cryptocurrency trader all the profit is treated as income (without the ability to apply the Capital Gains Tax 50% discount) and losses can be applied against their other income if certain conditions are met.
Personal Use Asset
The third category are those that use cryptocurrency as a personal use asset. This essentially means the user is using cryptocurrency to buy goods and services where it is not as convenient, or not available via Australian dollars. Under this category the cryptocurrency is just treated as cash and not taxed. However, if crypto currency is held for any length of time, or if the individual retains the cryptocurrency because they believe it will increase in value, then they will be treated as an investor. They will switch from someone who is using cryptocurrency for personal use to someone who is investing and will be taxed on their gains.
Whether you are a cryptocurrency investor or trader, it is necessary that proper documentation is held to keep track of cryptocurrency transactions. While many cryptocurrency platforms do not include cryptocurrency tax reports within them, some can be purchased within the platform for a fee. There are also other third-party platforms online that can collate your cryptocurrency transactions to prepare tax reports. These reports then used to prepare their income tax returns. Whatever the format, it is important to keep track of the cryptocurrency transactions throughout the year to ensure the correct tax treatment can be determined and included in your income tax returns.