Cryptocurrency is still a relatively new space for investors, traders and tax professionals alike. But what are the personal tax implications of crypto? And what do you actually need to do when it comes to tax time? Let’s take a look at the 4 top questions our clients ask us:
1. At what point do I need to consider the tax implications of buying and selling cryptocurrency?
The ATO considers a taxable event has occurred on the disposal of a crypto asset. Disposal events do not occur simply on a sale of a crypto asset. Rather any of the below four events are considered disposal of a crypto asset and can trigger a taxable event:
- Sale or gift of crypto
- Trade or exchange of one crypto for another
- Conversion of crypto to fiat currency (such as Australian dollars); and
- Use of cryptoto purchase goods or services.
2. How do I calculate any gains or losses when exchanging one cryptocurrency for another?
When exchanging one cryptocurrency for another no Australian dollars have been exchanged in this process and therefore calculating any gains or losses that have occurred can be a little more complex. The ATO has advised that the best practice is to utilise your fiat currency exchange rate from a reputable coin exchange (such as Coinspot or Binance) on the day of trade to calculate whether any gain or loss has occurred on the disposal of your crypto asset for a new crypto asset.
3. Am I an investor or a trader in cryptocurrency? What is the difference?
This can be a difficult distinction when considering crypto. Simply trading large volumes of crypto will not automatically make you a trader. Rather the ATO considers someone to be in the business of trading cryptocurrency if:
- They carry on their trading activity in a commercially viable way
- Undertake activities in a businesslike manner i.e have a business plan and acquire capital assets in line with achieving that plan
- Prepare accounting records and market a business name or product; and
- Intend to make a genuine profit in the long run
The treatment of the two activities differ in the following manner:
As an investor:
- You will be required to calculate capital gains or losses on each taxable event.
- Capital gains will be assessable on your taxable income whilst capital losses will only be available to reduce future capital gains.
- If the cryptocurrency assets at time of disposal have been held longer than 12 months you will be eligible for the 50% CGT discount.
- You are unable to claim deductions for equipment used in your trading activity.
As a trader in business:
- Your cryptocurrency assets are treated as trading stock. Therefore, all acquisitions are treated as an expense and all disposals as income whilst your opening and closing stock values are included in your cost of sales.
- Business losses may be able to offset against your other assessable income at year end, however there are additional rules around this that need to be considered.
- Any equipment you use in your trading activity may be deductible against your business income.
- You will not receive a 50% discount for any items held longer than 12 months.
4. What records do I need to keep?
The ATO recommends keeping the following records in regards to your cryptocurrency transactions:
- The date the transactions took place (both acquisitions and disposals)
- The value of the crypto in fiat currency (Australian dollars) at the time the transaction occurred; and
- What the transaction was for and who the other party was (in most cases this will likely be to or from an exchange)
These records can be hard to keep track off especially if you are transacting hundreds and potentially thousands of trades each year. There a number of programs that are now available that can collate this information for you into a package to prepare for your accountant such as:
In addition to the above there are other more complex matters regarding the tax treatment of cryptocurrency such as loss of assets from hacked exchanges, chain splits and staking rewards.
If you need help understanding cryptocurrency and your tax obligations, contact us here.