Cryptocurrency has quickly become one of the most popular asset classes available for individuals looking to diversify their holdings, however, many investors who have sold their assets don’t know how, when or where to declare it in the their tax return. Given it's ever developing nature and uses, it is important when it comes to Crypto to know what is classed as taxable income.
Recent developments in the regulation and monitoring of the industry would suggest that the industry is facing increased legitimization. For example, the ATO now receives data from exchanges to ensure tax compliance and has abided by their guidance on Cryptocurrency related tax since 2014. In addition to this, Crypto exchanges, such as Swyftx, are required to required to register with AUSTRAC and carry out customer verification processes known as KYC (Know Your Customer). Cryptocurrency is becoming more and more regulated as it continues to develop and these regulations mean there are important legal ramifications for both customers and exchanges like us.
Similar to gold and silver, the Australian Taxation Office (ATO) recognizes a Crypto transaction as “akin to barter arrangements for the purposes of income tax” and classes cryptocurrency as both property and an asset when it comes to capital gains tax (CGT).
How is Crypto Taxed in Australia?
In Australia, Cryptocurrencies are taxed when they are traded for goods and services, exchanged into fiat currencies such as the Australian or US dollar or when they’re exchanged into other cryptocurrencies. The Profits and losses made from trading in Cryptocurrency are considered for income tax purposes and can be treated as trading income or capital gains on investments depending on a number of factors.
For Business or Professional purposes
When investing in Crypto currency for business purposes, such as commercial cryptocurrency mining or you are considered to be a trader, regardless of it is personally, or through a trust or company, then the profits are treated as revenue, all “buys” are considered as purchases and “sells” as income. At the End of Financial Year (EOFY) the cryptocurrencies held are considered to be trading stock.
Crypto as an investment
When trading in Cryptocurrency, the gains or losses made from such trades are considered for income tax purposes and can be treated as trading income or capital gains on investments depending on a number of factors. The requirements for what transactions are taxable are covered in Transacting using Cryptocurrency, which notes that for a taxable event to occur you must have:
- Sold or gifted Cryptocurrency
- Traded or exchanged Cryptocurrency (for example selling one crypto for another)
- Converted Cryptocurrency to regular currency
This means that buying Cryptocurrency and holding, regardless of how long for, and then selling it, is deemed as an investment, which therefore means CGT applies. However using Crypto to purchase something for personal use such as some exercise equipment or those morning coffee's are classified as personal use, where capital gains doesn't apply, but GST will.
If you acquire Cryptocurrency as an investment you must pay tax on any capital gain you make upon disposal of the asset. Put simply, you will make a capital gain if the capital proceeds from the disposal of the asset are more than its initial cost. If you still hold a Crypto and the market value of the Crypto asset changes, but you continue to hold it, this is not taxable. This is only taxable once the asset is sold and a gain is made.
If you hold your Cryptocurrency as an investment for a period of 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it. If you have a net capital loss on one financial years trading activities, you can use it to reduce a capital gain you make in a later year. You cannot deduct this net capital loss from your other income(s).
When you dispose of one Cryptocurrency in exchange for another this is still recognized as a CGT event for the purposes of taxation. Because you receive “property” instead of fiat currency in return for your asset, the market value of the Cryptocurrency you have received from the transaction needs to be accounted for in Australian Dollars. If this can’t be calculated for any reason, specifically, if the Crypto can’t be valued in AUD, the capital proceeds from the disposal are worked out using the market value of the Cryptocurrency you disposed of at the time of the transaction.
Personal Use Assets
Some gains or losses that arise from the disposal of Cryptocurrency assets may be disregarded if the asset can be considered for personal use. Cryptocurrency can be considered a personal use asset if it is kept or used mainly to purchase items for personal use or consumption. Cryptocurrency will be considered for “personal use” if it is not kept or used:
- As an investment;
- In a profit-making scheme; and
- In the course of carrying on a business.
Where Cryptocurrency is acquired and used in a short period of time for the acquisition of items for personal use or consumption, the currency is likely to be considered a personal asset. This will likely differ where the Crypto currency has been acquired and held for a long time, then used for such purposes or only a small amount of the Crypto acquired has been used for this purpose. Here, the Crypto will be more likely to have been held for some other purpose – a likely taxable purpose.
The length of time that Cryptocurrency is held for will be a large indication as to whether it will be taxable when the asset is disposed of. For example, Cryptocurrency first purchased for personal use or enjoyment but ultimately kept as an investment, for profit means or as part of carrying on a business will likely be considered for CGT purposes.
You must keep records of each cryptocurrency transaction to work out whether you have a made a capital gain or loss from each CGT event. We here at Swyftx make this easy for you as we here at Swyftx we offer the generation of tax report's for easy to read breakdowns of your current positions. This can be done on our platform in the About function under Profile in the left hand menu which you or your financial representative can use the information in for the purposes of executing your Tax Return.
None of the information presented in this article is to constitute financial advice and is of a general nature only. If you are unsure about any of the rules, visit the ATO website, which has detailed information for cryptocurrency users or get in touch with a qualified accountant.