Contrary to what you might have previously believed, crypto is definitely on the ATO’s radar. In 2020 alone, some 350,000 notices were sent out to cryptocurrency investors.
So it is essential that you understand your tax obligations and keep good records regarding your cryptocurrency investments and movements.
Generally, crypto is taxed as a capital gains tax (CGT) asset when it is sold. However, the situation can become complicated should you trade heavily, whereby the sale might be on revenue rather than a capital amount. If you make a gain of less than $10,000, having used cryptocurrency for the sale, that gain may even be exempt from tax.
Let’s take a quick look at some of the various taxing points on crypto to obtain a better perspective.
CGT: Capital Gains Tax
Simply put, if the sale of crypto is a CGT event, then tax will be on the capital amount. However, if you are in the business of selling crypto, then you will be taxed on your income amount.
Should you be taxed on the capital amount, providing you have held on to the assets for more than 12 months, you will be entitled to a 50% CGT discount on the capital gain. If you have made a capital loss, this could be used to offset capital gains.
Situations that trigger a CGT event include:
- Converting crypto to fiat currency
- Gifting or selling crypto
- Crypto to crypto trades
- Using crypto to buy goods or services
Crypto-to-crypto trades trigger a CGT event. A crypto-to-crypto trade occurs where you swap one coin for another without ever using any fiat currency.
For example, you might exchange some of your Bitcoin holdings for other cryptocurrencies, without selling any of the holdings and converting your funds back to Australian dollars.
CGT still applies to the trade, even though any of the gains you have made have not been realised in fiat currency.
The cost base is determined at the time that you acquire the crypto and the gain or loss is the difference in value when you swap.
Therefore, it is essential to record the value of the cryptocurrency at the time that you trade it for another cryptocurrency.
If you are unable to calculate the value of crypto you receive in the trade, you can use the market value of the crypto you disposed of.
Personal use transactions are exempt from CGT when:
- Goods and services purchased are for personal use
- Capital gains made are for personal use and below $10,000
- Your crypto has not been seen to be kept as an investment, as part of a profit-making scheme or in the course of business activities.
An important factor is that you have not acquired, kept or used the crypto as:
- An investment.
- As part of a profit-making scheme.
- In the course of business activities.
You should also note that your purpose for holding crypto may change during the period of ownership. For example, you may have originally acquired bitcoin for personal use and enjoyment, but after a sharp rise in the price of bitcoin later decided to hold onto your coins as an investment.
Generally, the ATO assumes that the longer you keep crypto, the less likely it is for personal use.
A chain split is when there are two or more competing versions of a blockchain. Should you hold crypto as an investment, you receive another due to a chain split; you don’t derive ordinary income or make a capital gain at the time of the split.
If you hold the new crypto as an investment, you will make your capital gain once you sell it.
When working out your capital gain, the cost base of a new crypto received as a result of a chain split is zero. If you hold the new crypto as an investment for 12 months or more and you are not in the business trading crypto, you may be entitled to the CGT discount.
Ordinary income and trading stock rules apply if you are carrying on a business that involves transacting with crypto.
Proceeds from the sale of crypto held as trading stock in a business are ordinary income, and the cost of acquiring crypto held as trading stock is deductible.
If you are carrying on a business you will usually:
- carry on your activity for commercial reasons and in a commercially viable way
- undertake activities in a business-like manner – this would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan
- prepare accounting records and market a business name or product
- intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term.
Examples of businesses that involve crypto include:
- crypto trading businesses
- crypto mining businesses
- crypto exchange businesses (including ATMs).
There is also usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.
Whether you are carrying on a business and when the business commences are important pieces of information. If you are still setting up or preparing to go into business, you might not yet have started the business.
Money received (or property received) prior to a business being carried on is not generally assessable income. Likewise, you cannot claim deductions incurred prior to the business being carried on.
Crypto Tax Reporting requirements
You need to keep records of all your crypto trades so you can calculate any capital gains or losses and include them on your tax return.
It is extremely important that you keep records of all the crypto trades that are made so you can calculate any gains or losses that are made within a financial year and include these in your tax return.
Crypto trading software, such as CoinTracking and Koinly, can assist with keeping historical records of your trades and generating capital gain reports.
This type of software can help you track your trades and generate capital gains reports. It offers integration with many leading exchanges to make things even easier.
Tax treatment of crypto can be complex as the rules outlined by the ATO are still fairly new. If you are unsure as to whether the disposal of crypto is on income or capital account, you should seek advice.
Please ensure you discuss your situation with one of our advisors at Glance Consultants, who can offer you insights and advice on complex tax treatment of Cryptocurrency and associated record keeping obligations.