Although in its infancy, relatively speaking, cryptocurrencies are rapidly gaining in popularity as a wealth-building tool in a diversified investment portfolio. In April 2017, the combined market value of all cryptocurrencies was $35 billion; it is now over $388 billion.
The increasing interest and use of digitised assets and blockchain technology have created a new paradigm for investors and for the Australian Taxation Office (ATO). The issue of regulatory and taxation compliance will be a moveable feast, but for now the ATO has taken the view that cryptocurrencies (coins and tokens) are property and assets for capital gains tax (CGT) purposes, rather than money or fiat currency.
From your personal tax point of view, you need to determine whether you purchased cryptocurrency as an investor, in which case a sale, trade or exchange of cryptocurrency will be a capital gains event; a trader or miner, in which case a sale, trade or exchange will be a revenue event; or as a personal use asset, in which case a trade or exchange is likely to be a tax-free event. In all cases, the location of the exchange you use is irrelevant to your taxation obligations.
If you sell, trade or exchange your cryptocurrency, a CGT event has occurred and gains may be taxed. As with gains on shares, the gain is added to your other income and taxed at your marginal rate. Holding the cryptocurrency for 12 months or longer will result in a 50% discount on the gain.
A capital loss may reduce capital gains made in the same year or deferred to a later year. Net capital losses cannot be offset against other income.
Trading one cryptocurrency for another is a taxable event so you must determine the profit or loss on each trade.
Traders and miners
If you are trading or mining cryptocurrencies as a business, all profits you make on disposal or trade will be assessable as ordinary income, not as a capital gain. You may claim the costs of running your business as deductions and any cryptocurrency you hold at the end of the year will be considered as trading stock.
Personal use asset
Cryptocurrency may be a personal use asset if it is acquired and used to purchase items for personal use or consumption. It will not be regarded as a personal use asset if it is used as an investment, to make profits or as part of a business venture.
Capital gains from personal use assets acquired for less than $10,000 are disregarded for CGT purposes and all capital losses you make are disregarded. The 50% CGT discount will apply to purchases greater than $10,000 and held for 12 months or more.
If you receive cryptocurrency as payment in lieu of money, then you need to determine that amount in Australian dollars and factor that into your ordinary income. A reputable exchange will be able to provide the exchange rate. Similarly, when you use cryptocurrency to purchase items for a business transaction, you are entitled to a deduction based on the dollar value equivalent.
It is vital that you keep accurate records of all purchases, trades and sales. This includes the date of the transaction, the dollar value and the details of the transaction, for example if it was traded for another cryptocurrency or sent to a third party.
The ATO website details its current view on cryptocurrency but it is subject to change, so we strongly recommend that you obtain advice from a qualified accountant regarding your personal tax obligations.
The information in this article is general guidance only should not be interpreted as an endorsement of cryptocurrency which are complex, volatile and involve significant risks. Past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.