I am sure that all of you who have cryptocurrency, or are considering buying it, have wondered whether you need to pay tax on all the profits that you make (hopefully you do make profits!
:) ). Everyone seems to have a different opinion on the subject and it can get very confusing.
So here is my breakdown on the issue. (Please note that this relates to Australian taxation, although the rules may be similar to other countries such as the US for example.
This article is for information purposes only and does not constitute tax advice, please seek advice from a Registered Tax Agent to review your individual circumstances).
There are a number of scenarios that you need to consider and the tax consequences for each one are different.
Investing in Crypto
This is the most common scenario that occurs when you buy cryptocurrency and sell it at a higher price.
Such gains are treated as capital gains and form part of your taxable income.
Currency that is kept for over 12 months is eligible for 50% discount in capital gains tax. Capital losses are not tax deductible but can be carried forward to future tax years to be offset against future capital gains.
You may also reduce your capital gains by relevant purchasing and selling costs, such as broker fees.
Carrying On A Business of Crypto Investing
You may be considered to be carrying on a business of crypto investing if your investments are business-like. There are many factors to consider such as frequency of transactions, systematic approach, and other factors that would suggest that you are running a business, rather than simply investing.
The profits will be taxable as business income. Losses you make may be subject to the non-commercial loss provisions.
Using Crypto In Your Business
If you have another business and use cryptocurrency to accept payments from customers and to pay bills, the transactions are treated as normal business transactions for income tax and GST purposes.
Where you are in the business of mining cryptocurrency, any income that you derive from the transfer of the mined crypto 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.
Bitcoin and cryptocurrency mining explained
Losses you make from the mining activity may also be subject to the non-commercial loss provisions.
Using Crypto For Personal Transactions
Generally, there will be no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in crypto (for example, acquiring personal goods or services on the internet using crypto).
Where you use crypto to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the crypto will be disregarded (as a personal use asset) provided the cost of the crypto coin is $10,000 or less.
So as you can see, the taxation rules of cryptocurrency are not black and white and it is important to seek professional advice to assess your individual situation.
In the meantime, it is crucial to keep proper records of your transactions:
You need to keep the following records for cryptocurrency 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 crypto address).
I hope that this article has cleared up some confusion for you.
If you would like further professional advice, please contact me at [email protected]