Cryptocurrencies are an exciting new asset and one that's sure to change the way we handle transactions and money in the future.
Australia's relationship with crypto is overgrowing and there's no reason to think it will slow down anytime soon, which means figuring out your tax obligations is becoming increasingly important.
Before you make any investments, it is important to understand and consider how they will be taxed. Depending on how much you make and what stage of life you are in, different investments may make more sense than others.
Crypto Treatment
Bitcoin and other cryptocurrencies are considered to be a form of property for taxation purposes, not currency, so they are subject to capital gains tax (CGT) when they're sold or exchanged.
In addition, businesses that accept cryptocurrencies in exchange for goods or services must record the value of those transactions at the time of receipt — which may cause them to incur GST liabilities.
An example of this would be a business selling computers to another business whom which both businesses are registered for GST, the fact that the business selling the computer received payment in digital currency does not alter the GST outcome of the transaction and GST is still charged on the sale.
As with any other investment, the ATO recommends that you keep records of your cryptocurrency transactions and consult a tax professional if you're unsure about how to comply with these new rules.
There are a number of online software platforms such as Koinly or Coinspot that can produce a year-end summary or transaction report to assist you in gathering the required information to present to your tax professional for your tax return.
ATO Rules: Managing Your Tax Obligations
Recently, there have been changes in reportable income tax rules in relation to crypto assets. The ATO (Australian Taxation Office) now states that every crypto asset is treated as a separate asset and that each particular asset needs to be reported separately on your annual tax return.
This covers three different scenarios: taxpayers who have sold or traded their crypto assets, those who have been paid in crypto and those who are holding their crypto assets.
1. Taxpayers who have sold or traded their crypto assets will need to include the proceeds from the sale in their assessable income, with any capital gain or loss being calculated at the time of disposal. The profit or loss will be calculated by reference to the market value at the date of acquisition and disposal, rather than the amount actually received or spent.
2. If you pay someone in cryptocurrency / receive crypto for goods and services as part of your normal business activities then this will be considered ordinary income for tax purposes and taxed at your marginal rate.
3. If you use your bitcoin or other cryptocurrencies as an investment, then CGT is calculated using the 'cost base method'. This means that if you bought $100 worth of bitcoin in January 2017 and sold it for $200 in December 2017, then the CGT would be calculated as $100.
In respect to points 1 and 3 above where a Capital Gains Tax event (CGT) has occurred, please note that a taxpayer is entitled to a 50% discount on any profit on the sale of cryptocurrencies if the crypto was held for a minimum of 12 months prior to being sold. This is commonly referred to as the ‘CGT Discount Method’.
Cryptocurrency is taxable, and taxpayers must report each transaction involving digital currency.
There is a way to do so without negatively impacting your lifestyle; however, there are pitfalls that you should avoid to protect yourself from a shock next tax season.
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