Tax Implications of Cryptocurrency
With cryptocurrencies gaining notoriety, many people are unclear on how or when they can be taxed. Despite widespread belief to the contrary, you can be taxed on gains made as a result of obtaining or using cryptocurrency. If you’ve made a profit from trading cryptocurrency, for example, you need to declare it at tax time.
Here is some important information on cryptocurrencies and their implications for your taxes.
How cryptocurrency is defined
For tax purposes, the Australian Tax Office (ATO) defines cryptocurrency as “a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain.” This includes Bitcoin, or other digital currencies with characteristics that are similar to Bitcoin.
The ATO says cryptocurrency—including Bitcoin—is not Australian currency and is not foreign currency.
How cryptocurrency is taxed
You can be taxed on your profits when you exchange cryptocurrency for another currency, other cryptocurrencies, or to purchase goods or services. If they are used in business or professional activities, they may be taxed as income. For example, professional cryptocurrency trading or mining, operating cryptocurrency-related businesses, or operating a business using cryptocurrency transactions all count as income.
If the cryptocurrency is used in other ways—such as casually or as a hobby—it may be taxed as an investment and subject to capital gains taxes.
You are not subject to capital gains until you exchange or otherwise dispose of your cryptocurrency holdings. Typical transactions include:
- Selling cryptocurrency
- Gifting cryptocurrency
- Trading or exchanging cryptocurrency for another cryptocurrency or fiat currency
- Converting cryptocurrency to fiat currency
- Exchanging cryptocurrency to purchase goods or services
A capital gain on any of the above transactions, will result in being taxed on part or all of the gain. If you hold the cryptocurrency for more than a year before exchanging, selling or trading it, you may receive a 50% capital gains tax discount. If you have losses on the cryptocurrency exchange, you can use those to reduce capital gains in that year or future years.
Cryptocurrency obtained or held as an investment may be subject to capital gains taxes. Your reason for purchasing or keeping the cryptocurrency is as important as the reason for exchanging it. Even if you use it for a personal purchase, if you acquired it as an investment you must report it and it may be taxed as a capital gain.
Keeping proper records
No matter your reasons for purchasing, holding or using cryptocurrency, it’s important that you keep proper, detailed records of all cryptocurrency transactions. This means keeping a record of the date of each transaction, the value of the cryptocurrency in Australian dollars at the time of the transaction, the purpose of the transaction, and the other party’s details.
Keep all receipts of any transaction including cryptocurrency and records of all costs associated with the transaction.
If you’ve been involved in any cryptocurrency transaction in the past year, it’s important that you keep proper records and report the transaction to ATO. Although many people think they do not have to pay taxes on cryptocurrencies such as Bitcoin, the ATO views them as income or investments and they can affect your taxes.
O’Brien Senior Advisor, Will Sullivan, is a specialist in cryptocurrency taxation and has an in-depth knowledge of the broader considerations in this field. Will has successfully assisted clients with complex matters in this area. If you would like to understand further how Will can assist you in achieving the best outcomes and ensuring you have peace of mind regarding your cryptocurrency tax obligations, please contact us.