Cryptocurrency tax obligations – don't be caught out!
Cryptocurrency trading has dramatically increased since the beginning of 2020. However, many taxpayers think they are living a faceless Cryptocurrency tax free world as they dabble in these assets.
The Australian Taxation Office has found over 600,000 taxpayers who are actively trading this currency and has warned owners they will be slugged with penalties and audits if gains are not declared at tax time.
Assistant commissioner, Tim Loh, stated, ‘we are alarmed some taxpayers think the anonymity of cryptocurrencies provides a licence to ignore their tax obligations.’
Although cryptocurrency operates in an anonymous digital world, the tax department can track where it interacts with the real world through data from banks, financial institutions, and online exchanges – where they can follow money back to the taxpayer.
What are your Cryptocurrency tax obligations?
In this post we will explain the tax treatment of the currency and how it is important to keep records of all your trading and usage.
Just like shares, cryptocurrency is considered an asset and is subject to capital gains tax (CGT). A capital gains tax event occurs when you dispose of your cryptocurrency. A disposal can occur when you:
- sell or gift cryptocurrency
- trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
- convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars, or
- use cryptocurrency to obtain goods or services.
If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed.
If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.
While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.
Cryptocurrency as an investment
If you acquire cryptocurrency as an investment, you may have to pay tax on any capital gain you make on disposal of the cryptocurrency.
You will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its original cost. Even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.
If you hold the cryptocurrency as an investment, you will not be entitled to the personal use asset exemption. The personal use asset exemption is when cryptocurrency is acquired and used quickly to make transactions – say you purchase cryptocurrency one day and with the next day you purchase something else online with it like concert tickets, electronics, or video games. The longer you hold the currency the less likely it is seen to the ATO as a personal use asset.
If you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.
If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You cannot deduct a net capital loss from your other income.
What did this mean for you? It is vital you keep records for all your transactions with cryptocurrency, no matter how you are using it. You must keep records of each cryptocurrency transaction to work out whether you have a made a capital gain or loss from each CGT event. Keeping sufficient records will make it easier to to calculate and meet your Cryptocurrency tax obligations, and if you are in business, they will assist you to manage your cash flow and see how your business is doing.
A lot of people see cryptocurrency, especially Bitcoin as a good investment and the rise in its value proves this. But with the crack down from the ATO and the complication of its obligations it is wise to seek advice on your Cryptocurrency tax requirements.
Growth iQ has invested in specific Cryptocurrency software and resources, where we can now manage your records sufficiently and ensure you meet your tax obligations. We can also put forth proposals on how to manage, grow and protect your digital wallet.
If you would like to discuss your Cryptocurrency tax obligations further or just simply learn more about the digital currency or our business services, book a complimentary consult with our specialist, Alex