CRYPTOCURRENCIES & AUSTRALIAN TAX
So you’ve put some hard earned cash into the newest investment sector known as cryptocurrencies, made a gain but not sure what, if any, tax implications investing in cryptocurrencies has.
Unfortunately for those lucky enough to be in the green there are tax implications, similar to that of share investing, which I will touch on later.
Firstly, cryptocurrencies were made famous by Bitcoin and it’s extreme volatility. Overall the value of Bitcoin has soared since Bitcoins inception in 2009 from USD$0.003 March 2010 to currently USD$10,313. That is a staggering 3,437,666% increase!
In amongst that huge gain is several times where Bitcoin has dropped up to 50-75% value in a matter of days, meaning investment is not for the feint hearted.
Meaning USD$10 in March 2010 then would get you 3,333.33333333 Bitcoins, those Bitcoins would right now be worth USD$34,376,666.67 if you managed to stave off the temptation to sell along the way or like one unfortunate fella buy 2 pizzas for 10,000BTC (USD$0.01/BTC). That’s now an expensive pizza or a lot of tax liability.
All crazy stats aside, reality is the majority of people buying Bitcoin are doing so for investment. So do I have to pay tax on my gains? Unfortunately Yes, and it is all fairly common sense application in that it is in line with traditional securities and business practices.
The ATO has issued guidelines for the taxation of various Bitcoin and cryptocurrency activities. There is currently no test case from the ATO backing up any of their positions however there is a task force in place that no doubt is looking to come down on any Australians caught tax evading. It is a very serious thing to call it tax evasion, but that is what exactly it is. Everyday there are hundreds of conversations online regarding tax on cryptocurrencies in Australia with many believing they can outsmart the ATO by transferring from wallet to wallet etc If this is you I’d start praying the ATO doesn’t catch you, and if they do pray you don’t get thrown in jail and instead cop a 75% penalty on any tax shortfall for intentional disregard.
What do the ATO guidelines actually say?
The guidelines cover a wide range of uses of cryptocurrencies such as personal use, business use, investment, paying staff, and mining of cryptocurrencies. So lets take a look at each of these activities and the intended standpoint of the ATO.
If you use Cryptocurrencies to purchase goods and services for personal use or consumption then any gain or loss will be disregarded, so long as the original purchase was less than AUD$10,000. Now this doesn’t mean go buy $9,999 of Bitcoin, wait for it to increase to $15,000 then cash it out and spend on something personal. What it means is if you buy Bitcoin to specifically pay for something personal then the gain is disregarded for example;
- you got some legal advice and given the option to pay in Bitcoin. You go home and buy Bitcoin and immediately transfer to lawyers details. Any gain/loss in the process is disregarded as no profit making intention as Bitcoin purchased to pay for personal goods & services.
- You got some legal advice and given the option to pay in Bitcoin. You already have some Bitcoin and decide to use it to pay for legal fees. You initially invested in Bitcoin at a price of $2,000 but is now worth $4,000 meaning currently a $2,000 gain. Now say the legal fee was for $2,000 you would be spending half of your Bitcoin on personal use. In this scenario when you dispose (transfer to solicitor) the $2,000 worth you would be triggering a taxable event ($1,000 taxable) as you invested in Bitcoin with profit making intentions.
If you operate a business in Australia and are using cryptocurrencies to receive & make payments for genuine business income & deductions then the value of each transaction needs to be recorded in AUD$ so it can recorded for GST & income tax records. Transaction in cryptocurrencies for business use has the same implications for GST & income tax as using AUD (fiat).
If, like most, you purchase cryptocurrencies as an investment then you will fall in to one of 2 categories for taxation purposes in Australia, trader or investor;
- Trader – In this scenario you have a calculated & planned profit per trade, trading repetitively and frequently in an organised business-like manner (e.g. business premises, qualifications/training, registered business name & ABN etc). This means for tax purposes your profit/loss is simply added to your taxable income like any other sole trader. Any cryptocurrencies purchased are tax deductible and and=y sales are assessable income. In regards to the tax return there is also the issue of reporting trading stock. Meaning at 30 June any cryptocurrencies held need to be reported as closing stock (usually at cost price). Closing stock is assessable income. The next year that same closing stock figure is reported as opening stock, which is a tax deductible item
(Opening stock >Closing stock variance is deductible, Opening stock < Closing stock variance is assessable income). If a loss is made then the non-commercial loss provision will need to be considered before being able to deduct the activity against other income, if it is non-commercial loss then it is carried forward to next year until the activity is profitable. No GST is payable on purchase & sales of cryptocurrencies.
- Investor – In this scenario you are someone who invests in cryptocurrencies for profits but are not trading them frequently. For tax purposes the gains/losses are treated as capital gains. Gain/loss is figured out by sale price less purchase price. The gain can be reduce either by prior capital losses or by 50% if the cryptocurrency was held for longer than 12months. The net gain is assessable income, if there is a net loss then the loss is carried forward to future tax returns and can be deducted against future gains. Example; Bought Bitcoin for $5,000 and sold for $10,000 making a $5,000 gain. If the Bitcoin was held for longer than 12months then the taxable gain would be reduced to $2,500, if the Bitcoin was held for less than 12 months then the taxable gain is $5,000. This gain is added to your taxable income and taxed at the relevant marginal tax rate of the individual/entity.
Much to common misconception a trade from cryptocurrency to cryptocurrency still counts as disposal for tax purposes (e.g. traded BTC to ETH is the same at BTC to AUD) so make sure you keep records of all trades as the ATO won’t except the answer of I didn’t realise I needed that detail ‘I think it was this much’. The ATO will make their assumptions based on information at hand and assess you per their calculations until proven otherwise. If you can’t prove your position they will use their calculations and assumptions which may result in you paying more tax than you should. KEEP RECORD OF ALL TRADES IN AUD VALUE!!
Staff can request (at employers discretion) payment of wages via cryptocurrencies either as a valid salary sacrifice (resulting in fringe benefits tax for the employer) or as payment instead of AUD$. Using cryptocurrencies does not change the employer obligations in regards to PAYGW or superannuation. The value of wages paid still needs to be converted back to AUD for the FBT and income tax records. Any gain or loss incurred on the payment by the employer would be assessable/deductible and the employee is still receiving taxable income (except unless in a FBT situation) and must report accordingly in AUD on their tax return. The taxation of gains/losses on the cryptocurrency for the employee upon eventual disposal will depend on the intent of use, for taxation purposes if is kept for investment the cost base would be the AUD value received as wages.
If you are mining cryptocurrencies you should have an ABN as you are operating a business. Any fees received for the act of mining cryptocurrencies is assessable income. Costs associated with the business (computer, electricity etc) is tax deductible. Any losses on the activity would be subject to non-commercial loss rules. GST is payable on the supply of cryptocurrencies (fees income) and any cryptocurrencies being mind that are on hand at end of the year are treated as trading stock (see my explanation of trading stock under Investment section). Any profit on the business of mining is added to the assessable income of the individual or entity undertaking the activity and taxed at relevant tax rate.
As you can see it is a bit of a maze. If your position is looked at pre 30 June 2018 there will still be time to possibly implement some tax saving techniques.
If you have any questions please give us a call or email and we can organise a discussion/assessment of your situation and likely tax outcome for the upcoming 2018 tax year.