The content in this article is provided for general information purposes and is not tax, legal, investment or other professional advice. Readers should seek appropriate professional advice prior to making any decision.
I simply had to put out a blog in recognition of the Bitcoin price surpassing $5,000 USD yesterday. In fact, in the last few hours the price has breached $7,000 Australian dollars for the first time. Will this price boom end soon or is this just the beginning? I'll leave that for you - traders and investors - to work out.
In this article, I'm going to explain the Australian tax issues faced by those participating in cryptocurrency to cryptocurrency trading. This is for educational purposes and is certainly not a recommendation to, or not to, invest in cryptocurrencies.
Firstly, we need to understand how Australian tax law classifies cryptocurrencies/crypto-tokens /crypto-assets; whatever you want to call them. They do not fall into the definition of foreign currency. They're treated as a digital commodity. A bit like digital gold, digital silver, digital copper, if there was such a thing.
So, what this means is that when you acquire a cryptocurrency, you are acquiring an asset, rather than a currency. It’s likely you’d first acquire a cryptocurrency, lets say Bitcoin for this example, by transferring over Australian dollars. Say you acquired 1 Bitcoin at the start of the year for $1,400. For tax purposes, you don’t have any income to report yet because you have simply swapped Australian dollars for 1 Bitcoin. What the tax law recognises is that the cost for that 1 Bitcoin is $1,400. The Australian dollars you gave to acquire it. You should keep a record of this.
Last I read there are 4,831 different cryptocurrencies! To name the top five after Bitcoin, they are Ether, Ripple, Bitcoin Cash, Litecoin and Dash. These cryptocurrencies are similar in some ways and different in others. They are their own asset separate from one another. A common analogy is that bitcoin is “digital gold” and Litecoin is “digital silver”.
What do we recognise for tax purposes if we dispose of one type of cryptocurrency for another? Well, it’s like if we had a gold bar and swapped this for a stack of silver coins. We have disposed of our original asset (e.g. gold) and acquired a new asset (e.g. silver).
Let’s say today we use the 1 Bitcoin we purchased at the start of the year to acquire Ether. Our 1 Bitcoin lets us buy about 20 Ether. The price of Bitcoin is $7,000, as reported by reputable Bitcoin exchanges. For tax purposes, we have disposed of the 1 Bitcoin for $7,000 worth of Ether. This means, going forward, the tax law recognises that the 20 Ether cost $7,000. We need to keep a record of this. Regarding the disposal of the 1 Bitcoin, the tax law asks us to determine whether we made a profit or a loss.
The profit/loss is calculated using the formula:
Sales proceeds – acquisition cost – other associated costs
An example of other associated costs is interest if we had borrowed to fund the purchase. For the purposes of this article we will ignore these/assume we had no other costs.
The 1 Bitcoin was worth $7,000 at the time we shifted out of Bitcoin to Ether. This is our sale proceeds. When we originally purchased the bitcoin the cost was $1,400. Accordingly, our profit is $7,000 less $1,400 which is $5,600.
How do we declare this in our tax return? It usually depends on whether you are a trader or investor.
An active trader, 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 would be declaring the profit on revenue account. What this essentially means is that it is 100% assessable, similar to how your employment income is taxed. Ordinarily, the profit can be offset against other tax deductions, or if you make a loss, it can be claimed as a tax deduction.
An investor is generally someone who buys and sells cryptocurrencies on an irregular basis with the intention of increasing their wealth in the medium to long term from price appreciation in the underlying cryptocurrency. They make gains and losses on their disposals, which are usually classified on capital account. This means they recognise them in accordance with capital gains tax. A gain made from disposing of a cryptocurrency acquired less than 12 months ago (like our example) is 100% assessable, unless you have prior year or current year capital losses to offset. On the other hand, if you held the cryptocurrency for more than 12 months then you may be eligible to use the general 50% CGT discount, which can limit the taxed component of the gain to 50%, subject to certain criteria. If you make a capital loss, then that cannot be claimed as a tax deduction, and is instead used to offset capital gains made that year, or it is carried forward to offset against gains made in future financial years.
For a more detailed explanation, I encourage you to refer to my previous blog Taxation of Bitcoin in Australia where I discuss the various potential tax implications.
What is very important to understand is that the Australian Taxation Office is aware people are undertaking cryptocurrency trading and investing, and they have the resources and power to raise tax assessments. In particular, they gather information from many different sources and use that information to identify when people may have unexplained wealth. Should they believe you have not declared your cryptocurrency profits, they have the capacity to issue you with a default tax assessment and raise penalties and interest charges on shortfall tax. This is not a position you want to find yourself in.
We know many Australians have been active in the cryptocurrency space for years and have found it very difficult to understand their tax obligations because this is all quite new and very few professionals understand what is going on. We’re very proud to be pioneers in assisting people from all across Australia with their Bitcoin and cryptocurrency-related tax affairs and have helped achieve significant tax savings for clients, as well as give them the peace of mind that they are acting within the law.
As one of Australia’s premier tax specialists on Bitcoin and cryptocurrencies, Munro’s invites you to contact us should you require our expertise in providing tax advice and assistance with your tax return lodgements. For seasoned traders, we know the thought of going through thousands of trades can be daunting, but we would like you to know we have experience working with other cryptocurrency traders and we would be delighted to have the opportunity to assist you also.