The rapid rise of cryptocurrency means many Australians now either invest in bitcoin and other cryptocurrencies or use them as a convenient way to pay for goods and services. But what happens on the tax front when your cryptocurrency portfolio suddenly pays big digital dividends?
CoinJar co-founder and CEO Asher Tan explains the key things you need to know.
Cryptocurrency use has grown exponentially in the last two years and Australians have embraced cryptocurrencies as a way to spend, send and trade money from anywhere in the world. Today Australia is the world’s 11th biggest market for bitcoin volume.
It comes as no surprise, therefore, that governments around the world are becoming increasingly focused on the tax consequences of the digital currency trend.
This year, the Australian Taxation Office (ATO) created a specialist taskforce to look at new ways to tax the asset class, with data-matching audits on the horizon to trace transactions to individual taxpayers.
So, with the end of financial year approaching, it’s important to understand the tax implications for any digital currency transactions you have made in 2018. Here are our three tips for EOFY:
1. Keep accurate records
The ATO in Australia views cryptocurrencies as assets, not currency or commodities, and therefore any financial gains made from the selling of digital currencies will generally be subject to capital gains tax (CGT) and must be reported to the ATO.
According to the ATO, there are two key reasons for an individual to purchase bitcoin – personal use or investment, and how you are taxed will depend on which category you fall into. Therefore, it is important to keep careful records of not only what you purchase but why.
If you are an everyday user of cryptocurrency, keep track of all purchases, trades and transactions. If you are a cryptocurrency trader, every buy and sell order must be recorded, just as you would record any share trades.
2. Know the CGT rules
Many cryptocurrency traders mistakenly think their profits are tax free, which is not the case.
Digital currencies purchased for less than $10,000 and used for personal use, for example purchasing groceries or paying bills, are exempt from CGT.
If, however, you purchased cryptocurrency as an investment, you may be liable for CGT when you dispose of the asset. The good news is if you held the cryptocurrency for 12 months or more, you may be entitled to a CGT discount of up to 50 per cent. In addition, any losses you incur when selling the asset can be offset against any other capital gains you make now or in the future.
3. Be business savvy
An increasing number of businesses are realising the value of cryptocurrencies by receiving payments and paying suppliers. Cryptocurrency transactions are immutable and non-reversible, eliminating the risks of credit card chargeback fraud for businesses. Transaction fees also tend to be lower and in many cases are quicker, removing reliance on third-parties who can sometimes slow down the process.
If you receive bitcoin for goods or services provided as part of a business, you will need to record this as part of your ordinary income for tax purposes. Where you purchase business items (including trading stock) using bitcoin, you are entitled to a tax deduction based on the ‘arm’s length’ value of the item acquired.
For the 2017-18 financial year, sales and purchases of digital currency are not subject to GST. Therefore you do not need to charge GST on your sales of digital currency and, similarly, you are not entitled to GST credits.
There are also rules in place if you are in the business of mining bitcoin or conducting a bitcoin exchange. Any income derived from these activities should be declared as assessable income but you can also claim related expenses as a tax deduction.
Cryptocurrency is becoming a popular way to conduct both personal and business transactions but it is important to know your way around the taxation laws. 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.
This article was first published on 27 June 2018 at Nestegg.com.au.
Filing your tax return? Email us at firstname.lastname@example.org to request your transaction history.