Cryptocurrency and tax

We are noticing an increase in clients who have purchased and/or sold cryptocurrency in the past 12 months. Often these clients do not realise there are tax implications when dealing with cryptocurrency.

Cryptocurrency transactions are reported to the ATO and are therefore required to be disclosed to your accountant when you do your tax return.

Cryptocurrency is a new and evolving area of investment and in some instances transactional currency.  When investing and trading in cryptocurrency it is important to consider the tax implications and record keeping requirements from the outset, as well as obtaining appropriate financial advice where making significant investment decisions.

The most important thing to remember is that if you sell, gift, trade, exchange, convert to money or use cryptocurrency to “buy” goods and services, and you make a financial gain – Capital Gains Tax (CGT) may apply to some or all of the amount gained.

Please see below for more details on some of the most likely cryptocurrency scenarios to be aware of.

1. Exchanging cryptocurrency for another cryptocurrency
If you exchange one type of cryptocurrency for another type of cryptocurrency, in doing so the ATO will consider this as disposing of one CGT asset to acquire another CGT asset. Which means that because you are receiving an asset (property) instead of money for your exchange, the cryptocurrency you receive needs to be accounted for/valued in AUD. If the cryptocurrency you have gained can’t be valued, the CGT will be calculated based on the market value of the cryptocurrency you exchanged at the time.

2. Cryptocurrency as an investment
If you have cryptocurrency for investment purposes, you may have to pay tax on any capital gain you make when you dispose (sell, exchange etc) the cryptocurrency. You must keep records of each cryptocurrency transaction to work out whether you have made a capital gain or loss.

3. Cryptocurrency as a personal use asset
If your cryptocurrency is considered a personal use asset, CGT may not apply.

Here’s how to tell if your cryptocurrency is a personal use asset or not:

If you have your cryptocurrency for just a short period of time and use it to purchase items for personal use or consumption it is considered a personal use asset.

However, if you hold it for a longer period of time, use it as an investment, profit maker or in the course of carrying on your business – it is more likely to be subject to CGT.

Ultimately, the longer you hold on to your cryptocurrency – the more likely it will no longer be considered a personal use asset.

4. Loss or theft of cryptocurrency

If you lost the private key to your cryptocurrency or your cryptocurrency is stolen, you may be able to claim a capital loss. In order to claim a capital loss, you would need to provide adequate evidence.

Questions? Feel free to call us if you’d like a better understanding of the tax implications.
Further info can also be found on the ATO website.