Cryptocurrencies, such as Bitcoin, are generally a digital asset or currency which operate independently of a central bank, authority or government. With the rise in popularity of cryptocurrencies in the past few years, the ATO has been working hard and has updated their advice about how profits from cryptocurrencies will be taxed. So, if you have cryptocurrency or are thinking about buying some, now is the time you need review and be aware of the potential tax implications.
As there are now a wide array of cryptocurrencies and some growing too fast for many government bodies to keep up, the current information available generally relates to Bitcoin or other crypto and digital currencies that have similar characteristics to Bitcoin.
What should I do if I invest in Cryptocurrencies?
If you transact or have transacted with cryptocurrencies in the past, it is important to keep a good record of all your transactions whether you are using these for investment, business or personal use.
Capital Gains Tax and Cryptocurrency
A Capital Gains Tax event occurs when you dispose of your cryptocurrency.
Capital Gains is considered when you:
- Sell or gift cryptocurrency
- Trade or exchange cryptocurrency
- Convert crypto to Australian Dollars or any other currency established by government regulation
- Use it for goods or services
What do I need to keep records of?
You need to keep records of the following in your transactions:
- Date of transaction
- Value in Australian Dollars
- Purpose of transaction and to whom
- Receipts of any purchases and transfers
- Records of Agent, accountant and legal costs
- Software costs in managing your tax affairs
When you keep clear records, it will make it easier to calculate and meet your tax obligations.
Will I be taxed on the disposal of Cryptocurrency?
Profits or losses from the disposal of a cryptocurrency bought and used for personal purposes may be disregarded as a “personal use asset”. Cryptocurrency is classified as personal use asset if it is used mainly to purchase items for personal consumption or handling. An example of this could be if you bought cryptocurrency to pay for personal expenses such as concert tickets or a video game.
If the disposal happens as part of a business that you carry on, the profits that were generated will be assessable as ordinary income and not as capital gains.
If you are acquiring cryptocurrency as an investment, you will have to pay tax if the capital proceeds from the time of disposal is more than its cost base. You will not be entitled to the personal use asset exemption. However, if you hold your cryptocurrency as an investment for over 12 months you may be entitled to a Capital Gains Tax discount (50% exemption) when you dispose of it. If you make a net capital loss on your cryptocurrency when you sell it, you may use that loss to reduce any future capital gains but you cannot offset the capital losses from your other income.
Either way, please keep all your records for buying, storing and selling in case the ATO ever wants to check. And, please note that the ATO is now getting data feeds from the Exchanges so they will know if you have crypto or have been trading.
If you have any queries about which category your cryptocurrency profits/losses fall into please contact us to discuss in more detail.