The Bitcoin frenzy in late 2017 was quickly followed by a crash over the next year that saw it drop from above AUD$25,000 to less than $4,500. Although we have no view on cryptocurrency performance, recent predictions from crypto analysts suggest the upward trend this year may be set to continue, with Bitcoin prices reaching upwards of $18,000 in the last month. This bull market is set to catch the eye of more and more Australians if this recent trend continues, raising many questions for the everyday taxpayer who may be looking to try their luck at investing in this unusual market.
If you invest or trade in cyptocurrency, it’s vital that you understand the tax consequences.
You will never pay tax at the point of purchase when it comes to Bitcoin or other cryptocurrencies, or if there is a change in the market value of your current holdings. Yet you may have to pay capital gains tax (CGT) when you sell or dispose of cyptocurrency later on.
Cryptocurrencies such as Bitcoin can be used to pay for goods and services all over the world, and have become a popular online payment method. If you have predominantly purchased Bitcoin to purchase items for your own personal use or consumption, there will usually be no tax to pay on disposal. An exception to this is if you acquire more than $10,000 for personal use and make a capital gain. But if you acquire more than $10,000 for personal use and make a capital loss, this will be disregarded. It is less likely the ATO will deem cryptocurrency a personal use asset if it is held for an extended period of time before any personal use transactions are made.
If you trade between cryptocurrencies, CGT will need to be calculated for the first asset held as it is deemed you have disposed of it before acquiring the second asset. This is achieved by taking the market value in Australian Dollars at the time of the disposal.
If you hold cryptocurrency as an investment for more than 12 months, you may be entitled to a 50% CGT discount upon disposal. It is important to note that this 12 month period resets every time you sell one cryptocurrency for another.
There are some cases where the trading of cryptocurrency will be treated as trading stock which takes it out of the CGT rules whereby proceeds are deemed as ordinary income. This form of trading will have to satisfy various conditions that suggest the activity is that of a business by nature.
Proper record keeping is essential. At our practice we’ve seen the consequences of poor record keeping around cryptocurrencies. The sheer volume of trades can make accounting for these difficult, and a lack of records can result in extra accounting fees or inaccurate tax records. It’s important to keep all purchase and sale documents, exchange records, and digital wallet codes and keys which hold important information such as transaction dates, costs, proceeds and who and what the transactions were for.
Author: Jake Solomon