Introduction
The selling and purchasing of Crypto Currencies (CC) and the taxation consequences once again brings into discussion the concepts of trading as opposed to investing as well as the determination of when is something purchased for personal use as opposed to purchasing to make a gain.
The ATO considers that CC are assets for CGT purposes – this is important because it means that when one form of CC is exchanged for another it brings about a taxation event – either capital or income (if you are a trader)
As a start to keep on the right side of the ATO should they make any enquiries you will need to keep a record of the following for each transaction.
CC – Personal Use
If you purchase CC for personal use, i.e. to pay for personal expenses, etc. then any gain made on the conversion will be subject to tax unless you paid less than $10 000 for the coin.
It is important to remember that to avoid tax on any profit made, the purchase must be under $10 000, and the purchase must have been for personal use. (not trading or investing)
Trading
If you trade in CC i.e. you purchase CC to make speculative trading gains, then all profits will be taxed as ordinary income, on revenue account - not capital gains – because the 50% discount only applies to capital gains – there will be no discount for traders.
All expenses will be tax deductable including purchases and the CC will be trading stock.
A trader is typically someone trading on a short term regular and routine basis (e.g. daily), who’s intention is to profit from short to medium term price fluctuations.
Investing
An investor is generally someone who buys and sells cryptocurrencies on an ad hoc basis with the intention of increasing their wealth in the medium to longer term from price increases.
The profits (and losses) made are considered capital gains and losses.
An investor in CC that has made a capital gain will be taxed on the gain – but in certain circumstances will be entitled to the 50% discount if the asset sold was held for longer than 12 months.
Crypto currency and your business.
If your business accepts CC as payment for goods or services, these payments are treated in the same way as when you receive any other currency. If your business is registered for GST, the price paid by the person paying in CC will include GST. Likewise, if you purchase goods or services for use in your business with CC then you will be able to claim GST credits on the transaction in your activity statement, even though you used digital currency to make the purchase.
To elaborate on the above I have included below some questions I received from one of our clients and have attempted to answer them. The questions are numbered consecutively
1. I deposit AUD to buy say Bitcoin.
Answer – no tax consequences yet - it is also assumed that Bitcoin was purchased, see below.
2. I use this Bitcoin to purchase alt coins in an ICO (initial coin offering).
Answer – as CC are considered assets this exchange will bring about a capital gains tax event (assuming that you are not trading) – thus the gain (or loss) will be on capital account and the gain (or loss) will be the difference between what you traded the Bitcoin (in Aus$) for and what you purchased the Bitcoin for (in Aus$)
If you are a trader, then the above applies except that the gain or loss would be on revenue account and there is no 50% discount if the CC is held for longer than 12 months.
Note the above assumes that the purchase of the Bitcoin was not for personal use.
3. I receive my alt coins from ICO into my online wallet a few weeks later.
Answer – no tax consequences – the cost base of the alt coins will include what was paid for them.
4. I sell these coins back into Bitcoin at a profit a few weeks after this.
Answer – This is another transaction – the effect is the same as in 2 above
5. I hold the Bitcoin on an exchange.
Answer – no tax consequences.
6. The price of the Bitcoin I now have can fluctuate wildly up and down.
Answer – no tax consequences, as the gains or losses are unrealised – only when an asset is exchanged, or some other capital gains tax event takes place – will there be capital gains tax consequences.
If you are a trader, then the value of the closing stock may be affected by market fluctuations.
Disclaimer
This post is for general information purposes only.
No action should be taken based on this information alone as your circumstances are unique and it is better to speak to a tax professional.
