The jury may still be out on whether buying cryptocurrency such as Bitcoin or Ethereum is a good investment or not, but those who own cryptocurrency must ensure they understand the tax implications, particularly in light of imminent changes to Australia’s anti-money laundering rules, says Peter Bembrick, tax partner at HLB Mann Judd Sydney.
“New rules that come into effect tomorrow (3 April 2018) mean that cryptocurrency exchanges will need to sign up to a new Digital Currency Exchange Register, and transactions exceeding $10,000 must be reported to AUSTRAC in line with the existing rules for bank transfers and cash transactions.
“This in turn makes it much more likely that cryptocurrency transactions will come to the attention of the ATO, and people will need to be ready to explain not only where the money came from, but also to show that they have followed the ATO’s rules.
“There are a number of areas that may catch people by surprise, if they haven’t done their research. It’s never a good idea to fall foul of the ATO and, as always, ignorance of the rules is not considered an adequate defence for failing to pay the appropriate tax.”
Mr Bembrick says there are six key considerations about tax and cryptocurrency:
The ATO’s guidelines state that cryptocurrency such as Bitcoin is not a currency, but rather is treated as an asset for tax purposes.
As such, the price in Australian dollars will change over time. Mr Bembrick says this is important because it means that there are tax consequences from the purchase or sale of a unit of cryptocurrency.
“As with other investments, the exact nature of the tax implications will depend on the taxpayer’s related activities as well as their intention when they acquired the cryptocurrency,” he says.
Mr Bembrick says that, just like any other investment, there a taxable capital gain when a cryptocurrency unit is sold for more than the purchase price, and a capital loss when it is sold for less than originally paid.
“The capital gain or loss needs to be recorded on the personal tax records, just as any other investment such as shares.
“For Australian residents who have held the cryptocurrency for at least 12 months, a 50 percent CGT discount can be claimed, meaning they only pay CGT on half of the actual gain.”
Mr Bembrick provides a simple example: Lisa buys a parcel of Bitcoin for $3,000 as a long term investment, and sells the entire parcel for $9,000 three years later. Her gross capital gain is $6,000, which will be reduced to a taxa
ble capital gain of $3,000 by the 50% discount.
He added that people need to be aware of the difference between “investor” and “trader” for tax purposes.
“Just like other investments, be aware that the ATO may treat some investors as a “trader” or “speculator”. This means that, if the purpose of buying and selling cryptocurrency was for short term profit rather than long term capital growth, then any gains would simply be taxed as personal income, without any access to the CGT discount and without the ability to offset any capital losses from other investments against the cryptocurrency gains.
“The only good news is that trading losses can be offset against other types of income,” Mr Bembrick says.
A personal use asset (such as a car, boat or holiday home) is exempt from CGT if it costs less than $10,000.
Mr Bembrick says the ATO will accept that cryptocurrency is a personal use asset if it can be shown that it was acquired purely to hold and then exchange for other goods and services, and not with the intention of making a profit or in the course of carrying on a business.
“In Lisa’s example above, if she could show that she acquired the $3,000 parcel of Bitcoin with the intention of using it to pay for goods or services, and six months later cashed in the entire amount for $5,000 as partial payment for a home renovation, this can be treated as a personal use asset and the $2,000 profit would not be taxed.
“However the question of intention can be quite subjective and is not always so easy to prove.”
Mr Bembrick says the ATO expects people to keep records of their purchases and sales of cryptocurrency, including:
“As cryptocurrency such as Bitcoin is generally traded on an exchange, and by its very nature the transactions will be recorded electronically, obtaining and retaining records of the first three items should not be too difficult.
“With the nature and purpose of the transaction, in some cases this will be more obvious than others, but this will be the area most open to ATO interpretation, so it is critical to properly document intentions from the outset,” he says.
If someone is paid in cryptocurrency for goods or services they provide in the course of carrying on a business, this payment is still taxable, Mr Bembrick says.
“The ATO views this in just the same way as being paid with other goods or services, that is, as a form of barter arrangement. The taxable amount is the AUD value of the non-cash consideration for the goods or services at the time of the transaction.
“Similarly, if cryptocurrency is used to pay for goods and services in the course of carrying on a business, the AUD value of the payment would be treated for tax purposes in the same way as if you had paid the equivalent amount in cash.
“Returning to Lisa’s example above, if she made a $2,000 profit on buying Bitcoin and then sold it in exchange for receiving marketing services for her business, the profit would be included in the taxable profit of the business.”
Mr Bembrick says, generally speaking, the ATO would treat activities to acquire cryptocurrency by mining additional units as a business, and the value of units acquired would be assessable income in the year of acquisition.
“On the assumption that the cryptocurrency units are treated as either trading stock or CGT assets, however, then any further unrealised increased in the value of units held will not be taxable until they are eventually realised on a later disposal.
“In addition, if there are direct costs such as electricity or the depreciation of equipment dedicated to cryptocurrency mining activities, these should be tax deductible against the income received from the cryptocurrency mining business,” Mr Bembrick says.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.