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Do you own crypto? Here's what you need to tell the ATO

·4-min read
Cryptocurrency and tax: Here's what you need to know. Source: Getty
Cryptocurrency and tax: Here's what you need to know. Source: Getty

With explosive growth and periodic crashes, it’s been possible for cryptocurrency investors to make (and lose) substantial sums of money over startlingly short time periods.

One thing to bear in mind if you’re considering getting into crypto-currencies, or are already involved, is that there are tax implications to trading and investing in these new digital products

Here’s our guide to tax and cryptocurrency.

Also read:

Tax and cryptocurrency

If you buy cryptocurrency as an investment, Capital Gains Tax (CGT) will apply.

This is calculated based on the difference between the amount you paid for the cryptocurrency and the amount you disposed of it for. 

Any profit is subject to CGT, which can potentially be discounted by 50 per cent if you hold your cryptocurrency asset for more than 12 months.

Your capital gain is worked out like this:

  • Deduct the cost base from the sale proceeds. The cost base is the price you paid for the cryptocurrency plus incidental costs.

  • Next, take away any capital losses.

  • Then discount the gain. Individuals are entitled to a 50 per cent discount. The asset must have been held for 12 months or more for the discount to be available.

  • The resulting figure is your net capital gain. This is subject to tax at your marginal rate

Disposal occurs when:

  • Selling cryptocurrency for Australian dollars

  • Exchanging one cryptocurrency for another

  • Gifting cryptocurrency

  • Trading cryptocurrency

  • Using cryptocurrency to pay for goods or services

In some cases, such as when you gift it, market value is substituted for proceeds.

Be careful though – CGT is not always relevant. 

If you are acquiring the cryptocurrency to trade it, you might be deemed to be running a business of trading cryptocurrency, in which case you will pay income tax on the business profits (which is likely less advantageous than CGT, because the 50 per cent CGT discount cannot apply).

What happens if I make a loss?

If your sale proceeds are less than your cost base, you will make a capital loss. 

These losses can be offset against capital gains arising in the same year and to the extent they are not used up, they can be carried forward indefinitely until capital gains arise to absorb them. 

Capital losses can only be offset against capital gains, they can’t be offset against any other form of income.

If you lose your coins, they are stolen or you are otherwise subject to fraud you may be able to claim the value of your losses as a capital loss.

What is the personal use exemption?

Some taxpayers mistakenly think that you can buy up to $10,000 of cryptocurrency and avoid CGT by taking advantage of the ‘personal use exemption’.

This exemption only applies where the cost of the cryptocurrency does not exceed $10,000 and you can demonstrate that the cryptocurrency was to fund genuine personal consumption, such as paying for a holiday, a car, your wedding, etc. 

Mistakenly relying on this exemption is one of the biggest reasons people fall foul of the ATO; expect to be asked to provide proof that you either did – or intended to – use your cryptocurrency to fund personal spending on goods and services.

Where the cost of your cryptocurrency assets exceeds $10,000, the personal use exemption will not be available and CGT will apply, whether the asset was for personal use or not.

Tax implications of trading cryptocurrency

If you buy and sell cryptocurrency on a regular basis with a view to making a profit, then the profits on disposal of the cryptocurrency will not be subject to CGT but will be assessable income since you will be regarded as a trader rather than an investor. 

In effect, you’ll be regarded as being in business as a buyer/seller of cryptocurrency.

It can be a fine line between being an investor and a trader.

Broadly speaking if you are turning over your cryptocurrency every few days chasing profits, you have many transactions and you are running a business-like structure (with for example a business plan, accounts and records of trading stock, business premises, licenses or qualifications, a registered business name and an Australian business number) you will be a trader. 

If you are holding the cryptocurrency with a view to long term gain, you are likely to be an investor.

It can be quite a fine line between trading and investment so always take advice from an accountant or tax agent like H&R Block.

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