Cryptocurrency treatment at tax time
Cryptocurrency is treated like shares and many other investments for tax purposes, so it is generally regarded as a capital gains tax (CGT) asset
A CGT event occurs when disposing of cryptocurrency. Events can include:
- selling cryptocurrency for a fiat currency
- exchanging one cryptocurrency for another
- gifting it
- trading it
- using it to pay for goods or services.
Investing in cryptocurrency
Most people hold cryptocurrency as an investment, which they hope will grow in value over time to give them capital gains.
Each cryptocurrency is a separate asset for CGT purposes. When you dispose of one cryptocurrency to acquire another, you are disposing of one CGT asset and acquiring another CGT asset.
If you hold cryptocurrency for 12 months or more, you may be entitled to a 50% CGT discount to reduce any capital gains made when you dispose of it.
Similar to other businesses, when you are a cryptocurrency trader, consider:
- the nature and purpose of your activities
- the repetition, volume and regularity of your activities
- whether you have a business plan and your activities are organised in a business-like way.
If you are in business, the trading stock rules apply, rather than the CGT rules. If disposing of cryptocurrency is part of your business, then:
- the cost of acquiring cryptocurrency held as trading stock is deductible
- sales made are assessable as ordinary income, not as a capital gain
- changes in the value of trading stock held at the end of the financial year may need to be reported.
If you either gift cryptocurrency or receive it as a gift, you need to be aware of some basics.
- gift cryptocurrency, you are disposing of it, which is a CGT event and may have tax consequences
- receive cryptocurrency as a gift, there are no CGT requirements until you dispose of it.
Either way, you need to keep records of all transactions, including the date it was given or received and the market value at that time.
Cryptocurrency as a personal use asset
Most cryptocurrency is used to earn a profit, either through income or through capital growth.
The longer cryptocurrency is held, the less likely it will be a personal use asset – even if you ultimately use it for personal use or consumption.
Personal use assets are CGT assets that you keep mainly for your personal use or enjoyment.
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.
The relevant time for working out if an asset is a personal use asset is at the time of disposal.
The way a cryptocurrency is kept or used may change over time. For example, it may have been acquired for personal use and enjoyment, but ultimately kept or used as an investment to make a profit on when disposed or as part of carrying on a business.
The longer it is held, the less likely it will be a personal use asset – even if you ultimately used it for personal use or consumption.
Only capital gains made from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses made on personal use assets are disregarded.
Questions to ask
To help decide if you are investing, mining or using cryptocurrency as a personal use asset, you can ask yourself:
- How did you receive the cryptocurrency?
- When did you receive it?
- Why are you holding it?
- How long will you keep it?
- What will you do with it?
- Did you receive any income from it, for example, airdrops and staking rewards?
- How much is it worth in Australian dollars?
- When did you sell or dispose of it?
These questions will assist you when working out the cost base of the cryptocurrency for CGT purposes.
Follow these tips to avoid common errors at tax time:
- Report capital losses in the same year they occurred – carry forward net capital losses to later income years to offset future capital gains.
- When transferring cryptocurrency from one wallet to another, it is not considered a CGT disposal if ownership and control of the coin is maintained.
- Get the cost base right by including things like brokerage fees, transfer costs, platform costs, borrowing expenses, interest on loans and legal fees.
- Keep records:
- receipts and details of the type of coin, purchase price, date and time of transactions in Australian dollars
- records for any exchanges, your digital wallet and keys, and what was paid in commissions or brokerage fees
- records of tax agent, accountant and legal costs.
You can find details about cryptocurrency at Tax treatment of cryptocurrencies or call the team at Carrick Aland in Dalby, Toowoomba or Chinchilla on 07 4669 9800 about your tax planning.