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Have you been trading cryptocurrency?

Updated: Feb 4, 2022

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes cryptocurrencies almost impossible to counterfeit. The most popular cryptocurrency is bitcoin. Many cryptocurrencies are decentralised networks based on blockchain technology (a distributed ledger enforced by a disparate network of computers). The cryptocurrency functions outside of the traditional banking and government systems.

The Australian Taxation Office (ATO) has issued a few tax rulings in relation to the tax treatment of cryptocurrencies. In summary, a bitcoin (and other cryptocurrencies) under Australian tax law is:

  • A Capital Gain Tax (CGT) asset;

  • Trading stock when the bitcoin is held for the purpose of sale or exchange in the ordinary course of a business;

  • Not a foreign currency for income tax purposes - foreign exchange currency rules are not applicable to cryptocurrency;

Importantly, the common myth is that taxing only occurs when a trade in cryptocurrency is converted back into ‘normal’ currency, such as Australian Dollars (AUD).

In reality, taxing points occur every time a crypto unit (or part thereof) you hold is sold, exchanged or otherwise disposed of. This could include:

  • Converting or exchanging for a different crypto unit (e.g. exchanging Bitcoin for Dogecoin);

  • Exchanging or purchasing for goods or services (e.g. paying your accountant for business advisory using Ethereum); or

  • Cashing out to ‘real’ money (e.g. converting your Litecoin for US Dollars (USD)).

How are cryptocurrencies taxed?

Cryptocurrencies are able to be used in much the same ways as traditional currency, they are not a type of currency according to Australian taxation laws. Instead, they are treated similar to other investments for income tax purposes, such as shares.

More often than not, this means a cryptocurrency investment will be considered a Capital Gains Tax (CGT) asset. Capital gains here are taxable to taxpayers in the usual manner at their marginal income tax rate, and the general CGT discount may apply if held for longer than 12 months.

An example, this would mean that at the top marginal tax rate (47%) for individuals with the CGT discount, income tax of $588 would apply on the $2,500 investment gain.

Conversely, capital losses are quarantined and likely only able to offset against other capital gains (not against ordinary income, such as wages or business profits).

Similar to share trading though, there may be situations where trading cryptocurrency may instead be deemed to be business income. This may apply where there is a high volume of trading, the units are held for a short term or for speculation, and there is a business-like method or strategy underlying the transactions. This can be a grey area, and classification here will come down to specific facts.

Where a taxpayer’s cryptocurrency trading is considered to be in the form of a business, then no CGT discount applies (though unlikely anyway as generally held short term (less than 12 months)). However, the losses in this case are able to be applied against other ordinary income (as opposed to being quarantined, as capital losses are).

The ATO collects data from cryptocurrency designated service providers to identify individuals or businesses who may have or may be engaged in buying, selling or transferring cryptocurrency from the income year ended 30 June 2015. In order to be able to respond to any ATO enquiry, cryptocurrency owners or traders are required to maintain records in relation to their holdings.

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