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Tax treatment of cryptocurrencies in Australia – specifically bitcoin
Cryptocurrencies, especially bitcoin have become a key surveillance area for the Australian Taxation Office (ATO). The ATO is presently working to monitor tax compliance and associated tax obligations. Here is an outline of the ATO’s proposed tax treatment of cryptocurrencies:
- Investment – If you are holding bitcoins as an investment you will pay capital gains tax on any profits when you dispose of them
- Trading – If you are trading bitcoins for profit, the profits will form part of your assessable income
- Carrying on a business – If you are using bitcoins as payment for goods or services or accepting bitcoins as payment for goods or services, the transactions will be subject to GST
- Mining bitcoin – If you are mining bitcoins, any profits you make will be included in your assessable income
- Conducting an exchange – If you are buying and selling bitcoins as an exchange service you will pay income tax on the profits and transactions will be subject to GST
Buying Bitcoin as an investor:
The ATO views bitcoin as “‘neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.” This means if you’re making profit from Bitcoin, even though it’s not recognised as ‘money’ you still need to pay tax in the forms of capital gains, much like selling shares or property.
If Bitcoin has been held as an investment by certain individuals and trusts for more than 12 months, a 50% CGT discount may apply to reduce the taxable gain. This same rule should apply to other cryptocurrencies, however, you will need to provide proof of the original purchase.
You need to keep the following records for bitcoin transactions:
- the date of the transactions
- the amount in Australian dollars (which can be taken from a reputable online exchange)
- what the transaction was for
- who the other party was (even if it’s just their bitcoin address).
Each parcel of bitcoins purchases is considered as separate assets from CGT perspective. Therefore you need to record each purchase and disposal transaction.
It is possible to offset your capital loss made from other CGT assets (e.g. shares) against capital gains from investing Bitcoins. This could potentially neutralise any CGT payable from Bitcoin investment.
If you purchase bitcoin mainly for personal use or enjoyment, a capital gain made is disregarded if the first element of the cost base is $10,000 or less. In addition, any capital loss made from a personal use asset is disregarded. An example of where bitcoin would be considered to be a personal use asset is where an individual taxpayer purchased bitcoin from a Bitcoin exchange and uses the bitcoin to make online purchases for their personal needs, for example, clothing or music. If the bitcoin were instead purchased to facilitate the purchase of income producing investments, they would not be personal use assets. Another example of where bitcoin would not be a personal use asset is where an individual taxpayer mines bitcoin and keeps that bitcoin for a number of years with the intention of selling them at opportune times based on favourable rates of exchange.
Buying Bitcoin as an active trader (Crypto Trader)
If you buy and sell bitcoins in a form of business (e.g. actively trade Bitcoin frequently in order to make profit), any profit made from trading Bitcoin would be taxed as business profit. The proceeds you derive from the sale of bitcoin are included in your assessable income. Any expenses incurred in respect to the exchange service, including the acquisition of bitcoin for sale, are allowed as a deduction.
In this case, bitcoin is considered as trading stock. You are required to bring to account any bitcoin on hand at the end of each income year.
Similar to other types of business, (trading car, goods or shares), based on your circumstances, you may be considered as a Small Business Entity (SBE) and able to take advantage of the SBE tax concessions. If the profit was made through a company or trust, the profit could be taxed under the trading entity or distributed to beneficiaries who may have a lower marginal tax rate.
Bitcoin for goods or services
Where you are carrying on a business and purchase business items using bitcoin (including trading stock) you are entitled to a deduction based on the arm’s length value of the item acquired.
GST is payable on the supply of bitcoin made in the course or furtherance of your enterprise. GST is calculated on the market value of the goods or services. This is ordinarily equal to the fair market value of the bitcoin at the time of the transaction.
Where you are in the business of mining bitcoin, any income that you derive from the transfer of the mined bitcoin to a third party would be included in your assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses you make from the mining activity may also be subject to the non-commercial loss provisions.
Bitcoin held by a taxpayer carrying on a business of mining and selling bitcoin, will be considered to be trading stock. You are required to bring to account any bitcoin on hand at the end of each income year.
GST is payable on the supply of bitcoin made in the course or furtherance of your bitcoin mining enterprise. Input tax credits may be available for acquisitions made in carrying on your bitcoin mining enterprise.
Bitcoin exchange transactions (including bitcoin ATMs)
Where you are carrying on a business of buying and selling bitcoin as an exchange service, the proceeds you derive from the sale of bitcoin are included in your assessable income. Any expenses incurred in respect to the exchange service, including the acquisition of bitcoin for sale, are allowed as a deduction.
Bitcoin held by a taxpayer carrying on a bitcoin exchange will be considered to be trading stock. You are required to bring to account any bitcoin on hand at the end of each income year.
GST is payable on a supply of bitcoin by you in the course or furtherance of your exchange service enterprise. Input tax credits are available for bitcoin acquired if the supply of bitcoin to you is a taxable supply.
The tax consequences for transacting with a bitcoin exchange will depend on whether you are acquiring or supplying the bitcoin as part of a business transaction or for investment or otherwise (see the relevant guidance above and below).
Our experienced accountants are happy to help if you have further questions. Please feel free to contact us on 02 8065 1116 or [email protected] if you need any assistance.