Cryptocurrency has emerged as an alternative digital asset at the present time of uncertainty and of automation of businesses. The initial advantage of cryptocurrency was the apparent obscurity of its users. However, with time, as cryptocurrency evolved to become mainstream, given the resulting enormous sums linked by blockchain-based systems, governments around the world, including in Australia, have established guidelines and laws to tax income and gains derived from transection carried out in cryptocurrencies.
What are the latest Australian developments in taxation?
Most taxpayers are subject to income tax on the premise their cryptocurrency holdings are capital assets, whereby any gains realized from the disposal of cryptocurrency holdings are taxed as capital gains, but they are allowed a 50% CGT discount where the taxpayer is an individual or a trust. Superannuation funds are allowed a 33 1/3% CGT discount. The CGT discount is allowed only where the capital asset has been owned for at least 12 months.
In limited circumstances, cryptocurrency holdings can be designated to be revenue assets of the taxpayer (not capital assets). If so, gains realized from the disposal cryptocurrency holdings are taxed as revenue gains (not capital gains), without the availability of any discount. Where the cryptocurrency holdings are designated as revenue assets, the choice of appropriate methodologies for the valuation of cryptocurrency holdings as at the tax year-end may present some legitimate tax minimization opportunities.
Whether cryptocurrency holdings can be designated to be capital assets or revenue assets depends on the circumstances of the particular taxpayer, a designation that is carried out by the application of legal criteria established by case law. We can assist you in properly establishing that designation.
Documentation and record keeping
It is important to keep record of all your buy/sell transactions of cryptocurrency. In addition, documentation of your investment and trading strategy will assist in improving your position in the eyes of the Australian Taxation Office. At the end of the tax-year, transaction reports from the exchanges are also a must.
All records must be kept on Australian dollars using currency values published by respective exchanges using exchange rates as required by ATO. (Source: ATO https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?page=4)
You need to keep records giving the following information in relation to your cryptocurrency transactions:
- the date of the transactions
- 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 is just their cryptocurrency address)
The sorts of records you should keep include:
- receipts of purchase or transfer of cryptocurrency
- exchange records
- records of agent, accountants’ and legal costs
- digital wallet records and keys
- software costs related to managing your tax affairs
Please do not get scammed by con artists pretending to be genuine exchanges, and as a risk mitigation strategy always deal with recognized Australian crypto exchanges.
How will the ATO know?
The ATO has exchange agreements with all Australian exchanges and some exchanges situated overseas. Therefore, please do not attempt to conceal your cryptocurrency transections from the ATO.
Some common traps
- Failing to report when you convert one cryptocurrency currency to another – These conversions may give rise to taxable outcomes.
- The ATO’s treatment of cryptocurrency transections can differ from those adopted by the IRS in USA or those of other countries.
- Transactions in foreign-based cryptocurrency exchanges – If you are an Australian tax resident, usually you will need to recognize in your Australian income tax return the cryptocurrency transactions carried out by you through foreign-based exchanges. In rare circumstances, you may have to pay taxes to the country where the exchange is located.
- The ATO has determined that crypto currencies are not personal used assets. Consequently, the personal use asset exceptions do not apply even if you carry out trading in cryptocurrencies as a hobby.