For a brief moment, it seemed like the cryptocurrencies such as Bitcoin were the next biggest gold rush. The value skyrocketed and people who held a few low value digital addresses found themselves suddenly swimming in cash. Australia is one of the fastest growing frontiers of cryptocurrency investment and the country has enacted various regulations that govern the trading and holding of these new high value assets.
In terms of Bitcoin (BTC) volume, Australia is currently ranked 14th globally. While the Australian BTC trade pales in comparison to some of the global leaders such as Japan, it’s still a major global player. Millions of dollars worth of cryptos change hands in the country every 24 hours. But what are the tax or regulatory implications of this massive volume of crypto trade? Here are some important factors to keep in mind about cryptos and your taxes in Australia.
#1. What are the tax implications of cryptocurrency mining in Australia?
If you are engaged in a cryptocurrency mining venture such as Bitcoin mining either through cloud mining or via your own cryptocurrency mining rig, the Australian Taxation Office will treat such a venture as a business. The AUD value that you generate from your cryptocurrency mining is therefore treated as an assessable income in the year in which this value is acquired.
The ATO treats the cryptocurrency units as a CGT (capital gains tax) asset or as a trading stock so if there is any unrealized increased value in the cryptocurrency you hold, these will not be taxable until the value is realised via a disposal.
Cryptocurrency miners can also claim the relevant tax deductions for the expenses incurred when mining cryptos. These include expenses such as the cost of the depreciation of the mining rig, electricity costs and bandwidth costs among others. These expenses are tax deductible against the income that you get from your cryptocurrency mining activity.
#2. Cryptocurrency is treated as an asset for tax purposes
For tax purposes, the Australian Taxation Office will treat the cryptocurrencies held as an asset and not as a currency. The asset designation is important as it has a tax implication. If you acquire or dispose of your cryptocurrency, there will be certain tax consequences. The nature of the tax paid depends on a number of factors such as intention for the acquisition along with the other related activities that the taxpayer is engaging in.
#3. How Capital Gains Tax (CGT) Applies on Cryptocurrency Acquired as Investment
When it comes to CGT, cryptocurrencies are treated just like any other assets. You make a capital gain when you sell your cryptocurrency for a profit and a capital loss if you sell your cryptocurrency for less than the purchase price.
If you make a capital gain and are an Australian resident for tax purposes who has held the cryptocurrency investment for at least 12 months, you can claim a 50% capital gains tax discount. So you will end up paying taxes only on half of the gain.
However, if the Australian Taxation Office classifies you as a trader or a speculator, your capital gains will be taxed simply as an income, without the 50% CGT discount. As a speculator, you will also not be able to offset your capital losses from other types of investments against the gains that you have made from trading cryptocurrency. However, you can still offset trading losses against the gains made with other types of income.
#4. The Personal Use Exemptions
According to Australian Taxation Office, a personal use asset is any asset, other than collectables, that is kept for personal use or enjoyment. Examples include a car, boathouse, holiday home, a boat etc. Personal use assets can receive a special tax treatment. If it costs less than $10,000, the personal use asset will be exempt from the capital gains tax (CGT).
A cryptocurrency can also be treated as a personal use asset if you can show the ATO that you simply acquired it to hold it and exchange it for other goods or services without the intention of profiting from the crypto acquisition. This is however a very complex terrain as intention is a very subjective matter which cannot be proved easily.
#5. What records do you need to keep for tax purposes with respect to cryptocurrencies?
For tax purposes, the ATO requires taxpayers dabbling in cryptocurrencies to have records that indicate the following:-
- Dates for any purchases or sales of your cryptocurrencies.
- The value of each transaction in AUD.
- The identity of the other party that you are transacting with. You can simply provide their cryptocurrency address.
- The nature or the purpose of the transaction. For example, are you buying something from them? Are you paying for a service?
It is generally easy to obtain these records and submit them to the ATO. Cryptocurrencies are generally traded on an exchange and there is a clear digital trail of the transactions that you have performed over a time period.
#6. Take note of the tight cryptocurrency reporting requirements
Government regulators are moving fast to catch up with the developments in the cryptocurrency sphere. For example, there is a new anti-money laundering law that requires cryptocurrency exchanges to sign up for a new Digital Currency Exchange Register whereby any cryptocurrency transactions totalling more than $10,000 must be reported to the Australian Transactions Reports and Analysis Centre (AUSTRAC). This will be in line with the pre-existing transactions reporting rules for cash transactions and bank transfers.
With the new rules in place, more cryptocurrency transactions are going into come into the radar view of ATO. Traders or holders of the cryptocurrencies will also be under increased pressure to comply with the ATO cryptocurrency rules and explain where the money is coming from. Talk to an accountant Melbourne expert to advise you on navigating tax hurdles with cryptocurrencies.