Tax Treatment of Cryptocurrency
If you acquire or dispose of cryptocurrency, you need to be aware of the tax consiquences. Among other areas, the ATO will be scrutinising cryptocurrency exchanges in 2021 tax returns.
Transations With Cryptocurrency
A capital gains tax (CGT) 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)
- use cryptocurrency to obtain goods or services
Each different type of cyrptocurrency in your digital wallet is a separate CGT asset. If you make a capital gain on the disposal of cryptocurrency, you may be liable for capital gains tax. 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.
Selling Cryptocurrency
You may have to pay tax on any capital gain you make when you sell your cryptocurrency that you acquired as an investment. You will make a capital gain if the capital proceeds from the sale of the cryptocurrency are more than its cost base.
- cost base (cost of ownership including the purchase price of the coin plus certain other costs associated with acquiring, holding and disposing of it)
- capital proceeds (what you receive or the market value of what you receive) when you dispose of your cryptocurrency.
If you hold the cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain when you dispose of it. If you make a capital loss, you can use it to reduce a capital gain you make in a later year. You can’t deduct a net capital loss from your other income.
Example 1: Disposing of cryptocurrency purchased with fiat currency.
Tim purchases 400 USD Tether (USDT) for $800 AUD. A few days later Tim exchanges his 400 USDT for 2 Ether (ETH). Tim needs to report his capital gain or loss from the disposal of the cryptocurrency (USDT) in his tax return. Tim’s receipt show he:
- used $800 AUD to purchase 400 USDT
- was charged $5 for brokerage
Tim’s cost base is $800 + $5 which totals $805
Tim’s exchange provides a receipt for the purchase of 2 ETH but it does not include prices in AUD. According to his exchange records, Tim exchanged 400 USDT for 2 ETH on 25/6/2019 at 1.30pm. At the time of this transaction, the market value of 2 ETH is $900 AUD. Tim’s capital proceeds is $900.
Tim subtracts his cost base ($805) from his capital proceeds ($900) which results in a capital gain of $95. Tim is not eligible for a discount or exemption. So Tim will report a net capital gain of $95 in his 2019 tax return.
Exchanging Cryptocurrency
If you exchange one cryptocurrency for another cryptocurrency, you dispose of one CGT asset and acquire another CGT asset. This still constitutes a capital gains event, even though you receive property instead of money in return for your cryptocurrency. The capital proceeds from the exchange are worked out using the market value of the cryptocurrency you received in Australian dollars at the time of the transaction.
Example 2: Exchanging a cryptocurrency for another cryptocurrency.
A few months later, Tim exchanges his 2 Ether (ETH) for 0.08 Bitcoin (BTC).
Tim’s exchange records show he acquired 2 ETH on 25/6/2019 at 1.30pm for 400 USD Tether (USDT). At the time of the transaction, the USDT had a market value of $900 AUD.
Tim’s exchange charges him a $10 brokerage fee to trade 2 ETH for 0.08 BTC. Tim’s cost base is $900 + $10 which totals $910.
Tim’s exchange provides a receipt for the acquisition 0.08 BTC but it does not include prices in AUD. Tim’s receipt shows he disposed of his 2 ETH for 0.08 BTC on 13/7/2019 at 2.00pm. At the time of this transaction, the market value of 0.08 BTC is $1055. Tim’s capital proceeds from the exchange of 2 ETH for 0.08 BTC is $1055.
Tim subtracts his cost base ($910) from his capital proceeds ($1055) which results in a capital gain of $145. Tim is not eligible for a discount or exemption. So Tim will report a net capital gain of $145 in his 2020 Tax Return.
Personal Use Asset
Where cryptocurrency is acquired and used within a short period of time, to acquire items for personal use or consumption, the cryptocurrency is more likely to be a personal use asset. Some capital gains or losses that arise from the disposal of a cryptocurrency that is a personal use asset may be disregarded.
Cryptocurrency is not a personal use asset if it is kept or used mainly:
- as an investment
- in a profit-making scheme
- in the course of carrying on a business
However, if you acquire your cryptocurrency and hold it for some time before any personal transactions are made, or only a small proportion of the cryptocurrency acquired is used to make personal transactions, it is less likely that the cryptocurrency is a personal use asset, and you may be liable for CGT.
Example 3: Personal use asset
Josh pays $50 to acquire cryptocurrency each fortnight. During each of the same fortnights, he uses the cryptocurrency to enter directly into transactions (there is no conversion to a fiat currency first) to acquire computer games. Josh does not hold any other cryptocurrency.
In one fortnight, Josh sees a computer game he wants to buy from an online retailer that doesn’t accept cryptocurrency. Josh uses an online payment gateway to purchase the game. In these circumstances, the cryptocurrency (including the amount used through the online payment gateway) is a personal use asset for this isolated transaction.
Example 4: Investment in cryptocurrency
Rose has purchased cryptocurrency with the intention of selling at a favorable exchange rate. She decides to buy some goods and services directly with some of her cryptocurrency. Because Rose uses the cryptocurrency as an investment, the cryptocurrency is not a personal use asset.
Record Keeping
Keeping good records of all your cryptocurrency transactions is really important. You need to keep the following records:
- receipts of purchase and/or transfer including 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)
- exchange records
- what the transaction was for and who the other party was (their cryptocurrency address is sufficiant)
- digital wallet records and keys
- software costs related to managing your tax affairs
Keeping good records will make it easier to calcualate and meet your tax abligations at the end of the financial year.
The ATO obtains data relating to cryptocurrency transactions from cryptocurrency designated service providers. They use this data to identify the buyers and seller of crypto-assets and identify individuals who may not be meeting their reporting and lodgment obligations.
Further information can be found on the ATO website here. (Examples taken from the Australian Taxation Office)
