Cryptocurrency

The ATO's interpretation on the tax treatment of cryptocurency is slowly evolving as transactions in cryptocurrency become more and more common.

Although it does vary from crypto to crypt, the ATO's view is that they are neither 'money' nor 'currency’ but rather 'property’ and are assets which are taxable under CGT regulations.

The latest technology trend being traded are non-fungible tokens (NFT) which are units of data that are stored on a blockchain/digital ledger which can represent unique digital items (such as art, audio, video games and other forms of creative work). Unlike cryptocurrencies, an NFT is a crytographic asset which is not mutually interchangeable/fungible. The ATO have announced that the tax treatment of NFTs follow the same general principles as cryptocurrencies.

Each cryptocurrency has its own unique features which may result in a different tax treatment to other digital assets.

The tax treatment of cryptocurrency will also vary depending if you acquired it for:

• personal use

• investment

• trading

• business income and expenses.

Regardless of your situation ensure that you keep records in relation to your acquiring or disposing of cryptocurrency transactions.

A CGT event occurs when you dispose of your cryptocurrency. If you make a capital gain on the disposal of a cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses that arise from the disposal of cryptocurrency that is a personal use asset may be disregarded.

Only capital gains you make from personal use assets acquired for more than $10,000 are taxable for CGT purposes. However, all capital losses you make on personal use assets are disregarded.

Cryptocurrency is not a personal use asset if it is acquired, kept or used.

• as an investment

• in a profit-making scheme

• in the course of carrying on a business.

+ TAX FACT

If you acquire a cryptocurrency purely to purchase items for personal use or consumption - and it was acquired for under $10,000 - then any capital gain can be disregarded for tax purposes.

Similar to the discussion about share traders and share investors, if the disposal of your cryptocurrency is part of a business you carry on, the profits you make on disposal will be treated as ordinary income and not as a capital gain.

To be classed as a cryptocurrency trader for tax purposes, you need to demonstrate to the ATO that you:

• 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.

There's usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.

If you are considered to be a cryptocurrency investor then you are not entitled to the personal use asset exemption and may have to pay tax on any capital gain you make on its disposal. Just like with investments properties or shares, you will be eligible for the 50 per cent CCT discount on any gain if you hold the cryptocurency for more than 12 months. If you make a capital lose then it can be used to reduce capital gains made in the same year or future years. Net capital losses cannot be ofset against other income.

If you receive additional tokens via airdrops or staking rewards then the ATO may deem these as assessable income at the time derived. The cost base of the new tokens is deemed to be their market value at the time derived. By contrast, chain splits do not constitute a taxable event at the time of receipt.

If you lose your private key or your cryptocurrency is stolen then you may be able to claim the capital loss.

If you dispose of one cryptocurrency to acquire another cryptocurrency directly, the ATO will deem this to be a capital gains tax event despite not trading via Australian dollars.

You need to keep the following records in relation to your cryptocurrency transactions:

• the date of each transaction

• the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)

• what the transaction was for and who the other party was (even if it's just their cryptocurrency address).

If you receive cryptocurrency for goods or services you provide as part of your business, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income. This is the same process as receiving any other non-cash consideration under a barter transaction.

According to the ATO, there are approximately 600,000 taxpayers who have invested in cryptocurrencies through exchanges as at March 2022 on the back of a 64 per cent increase in their trading from the previous year.

Over the last two years the ATO's datamatching program has resulted in them contacting 100,000 taxpayers who have traded in cryptocurrency to remind them of their tax obligations and to review their returns. Any taxpayer who chooses to ignore the ATO's letter (that is, they do not amend their tax return for any capital gain or loss incurred) may receive further scrutiny including an audit of their affairs.

If you do a high value of cryptocurrency trading in a year, calculating capital gains or losses for tax purposes can be rather difficult. I have found cryptocurrency tax software (such as www.CryptoTrader.Tax) is saves you time and stress. Simply download your CSV file of all your transactions for the year from your exchange or wallet and upload them into the tax software to generate the year end tax reports.