In 2018, one Bitcoin was priced at $20 000 which was its highest price since it was created in 2009 and this was when most of the world woke up to this new concept of Bitcoin for the first time.
Bitcoin was initially valued at $0.00 and was below $1 for many years, so when, in 2018, it reached these sky-high values it became the latest news story that the world could not help but notice.
Also at this time many people may have bought some cryptocurrency with the hope of a “get-rich-quick” fix.
Bitcoin is the best known cryptocurrency, but there are actually over 7000 different cryptocurrencies in use at the moment, and the tax implications for all of them are the same. Some of the other cryptocurrencies you may have heard of are Litecoin, Dogecoin and Ripple.
Recently Bitcoin has hit $60 000 a unit, and people are looking at selling the cryptocurrency they bought back in 2018 with the expectation of some profits.
How would these transactions be taxed?
For the sake of completeness let’s first define what a cryptocurrency is.
The type of currency that we use everyday is called a fiat currency. This is a currency that is issued and controlled by a government. The Australian dollar and US dollar are fiat currencies.
A cryptocurrency is a digital asset that operates independently of a central bank or government. It is created and issued by private individuals or companies.
Now lets get back to our questions of how would these transactions be taxed?
The Income tax implications will depend on whether you operate a business or invest in cryptocurrency assets.
Lets have a look at these different scenarios.
Scenario 1 – Business
If one decided to buy and sell different cryptocurrencies as if one is selling any other merchandise or services, then one would treat the cryptocurrency as trading stock. Proceeds from the sales are treated as ordinary income, and the expenses related to this income are deductible expenses. The net profit would be treated as taxable income as in any standard business situation.
An example of this is:
Josh is in the business of trading cryptocurrency. On 15 February 2021, he purchases 1,500 Skycoin for $7 500. On the same day, he sells 1,000 Skycoin for $6 000. Since Josh holds the cryptocurrency for sale or exchange in the ordinary course of his business, Josh can claim a deduction for $5 000 being his cost of the purchase of these coins and declares income of $6 000 for the later sale of 1000 Skycoin. The 500 skycoin not sold, would be recorded as trading stock.
Scenario 2 – Investment
If one decided to purchase cryptocurrency in order to hold and sell some time in the future, then a capital gain or loss ( CGT) would be applicable.
One will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its cost base. Even if the market value of one’s cryptocurrency changes, one does not make a capital gain or loss until one disposes of it.
If one holds the cryptocurrency for more than 12 months then you are entitled to a 50% discount on the gain.
A loss can be used to offset future capital gains but not used to reduce ordinary income.
An example of this is:
In August 2017 Kerrie discovered Bitcoin and the world of cryptocurrency. She purchased a Bitcoin (BTC) for $5 300 as a speculative investment.
In February 2021 Kerrie decided to sell her bitcoin and convert it to Australian dollars. The initial investment of $5 300 had grown to $60 000. The capital gain of $54 700 ( $60 000 – $5 300) would be included in her taxable income for the 2021 tax year. As she held the cryptocurrency for more than 12 months she would be entitled to a 50% discount, so that only $27 350 capital gain would be included in her income.
It is also possible that someone could exchange cryptocurrency coins into a different cryptocurrency rather than into Australian dollars.
A person is effectively receiving an asset rather than money when the exchange is made and CGT would still apply.
All cryptocurrencies have a value in Australian dollars at any point in time and one would need to convert the cryptocurrency received into Australian dollars.
One would need to keep records of all crypto trades so that one would be able to calculate gains or losses and include them on your tax return.
Are there any situations when I won’t be taxed on the sale of Cryptos?
Yes. if the cryptocurrency you own is considered a personal use asset.
A cryptocurrency transaction is exempt from CGT if:
- Using cryptocurrency, you purchase goods or services for personal use. eg booking hotels or shopping at retailers AND
- A capital gain is ignored if you bought the original cryptocurrency for less than $10 000.
The following situations are NOT defined as personal use assets:
If Cryptocurrency is acquired,kept or used as:
- an investment
- part of a profit making scheme
- in the course of business activities
It’s also possible that one’s purpose for holding cryptocurrency may change during the period of ownership.
For example, one 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. According to the ATO, the longer you hold a cryptocurrency, the less likely it is to be a personal use asset.
An example of this is:
Peter wants to buy a new leather jacket from an online clothing retailer. The retailer offers a 20% discount for customers who pay with Bitcoin, so Peter buys $400 worth of Bitcoin from a crypto exchange and then uses it to buy the jacket the same day. In this situation, Peter’s cryptocurrency is classed as a personal use asset and isn’t subject to CGT.
Meanwhile, Peter’s brother Paul has spent several months acquiring a number of popular cryptocurrencies. His plan is to sell them for a profit once they’ve increased in price, but after hearing about Peter’s great deal on the leather jacket, Paul decides to use some of his crypto holdings to buy a pair of jeans from the same retailer.
However, because Paul initially acquired that cryptocurrency as an investment, it’s not classed as a personal use asset and is therefore subject to CGT.
What if my cryptocurrency is lost or stolen?
Just like we keep cash in a physical wallet, cryptocurrencies are also stored in a wallet—a digital wallet.
When you own cryptocurrencies, what you really own is a “private key.”
Your “private key” is comparable to an actual key: this key unlocks the right for its owner to spend the associated cryptocurrencies.
As it provides access to your cryptocurrencies, it should – as the name suggests – remain private. The same way you wouldn’t share the key to your bank safe with anyone, you should not share this private key with anyone.
If you lose your private key or your crypto holdings are stolen, you may be able to claim a capital loss. However, whether or not this is possible may depend on whether you lost the cryptocurrency, lost evidence of your cryptocurrency ownership or you lost a private key that cannot be replaced.
If an item can be replaced, it is not considered to be lost. But a lost private key is irreplaceable, so it may be possible to claim a capital loss by providing detailed evidence, including:
- The dates when you acquired and lost the private key
- The public wallet address linked to the private key
- The total cost of acquiring the cryptocurrency that was later lost or stolen
- The cryptocurrency wallet balance when you lost the private key
- Proof that you actually owned the wallet (for example, transactions linked to your identity)
- Possession of the hardware where the wallet is stored
- Transfers to the wallet from a digital currency exchange where you hold a verified account, or where your account is linked to your identity in some other way
Using cryptocurrency for business transactions
Does your business accept cryptocurrency as payment for the goods or services it provides? If so, the value in Australian dollars of the cryptocurrency you receive will need to be included as part of your ordinary income.
If your business buys items using cryptocurrency, you’re eligible to claim a deduction based on the market value of the item acquired.
Special rules also apply if you pay an employee using cryptocurrency:
- If there’s a salary sacrifice agreement in place, the crypto payment is classed as a fringe benefit and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act 1986.
- If there’s no salary sacrifice arrangement, the employee is considered to have derived their normal salary or wages. As a result, you’ll have to meet their pay-as-you-go obligations on the Australian dollar value of the cryptocurrency you pay to the employee.
What records do I need to keep?
Regardless of whether you’re considering your individual or business tax obligations, it’s essential that you keep detailed records of your cryptocurrency transactions. These should include:
- The date of each transaction
- The value of the cryptocurrency in Australian dollars at the time of the transaction (you can get this from a reputable crypto exchange)
- The purpose of the transaction
- The details of the other party involved (even if it’s just their crypto wallet address)
For example, if you want to claim the personal use exemption, you’ll need to be able to prove that you used your cryptocurrency to buy an item or service for personal use.
Examples of records you should keep include:
- Receipts of cryptocurrency purchases or transfers
- Exchange records
- Records of agent, accountant and legal costs
- Digital wallet records and keys
- Software costs associated with the management of your tax affairs
Should you have any questions specific to your situation, contact us at firstname.lastname@example.org or contact Accolade Accounting on (08) 6263 4466.