It’s extremely important to understand the rules and guidelines established by the Australian Taxation Office (ATO) when it comes to the tax implications of buying, selling, or using cryptocurrency. One of the first steps in determining taxability for cryptocurrency transactions is to distinguish if you’re classified as a ‘trader’ or an ‘investor’.
Are you a trader?
To be considered a “trader” by the Australian Taxation Office (ATO), it is important to establish that you have set up a business with the intention of generating profit from buying and selling cryptocurrency. In this instance, disposals of cryptocurrency are considered business income and are taxable at marginal income tax rates, rather than being eligible for capital gains treatment.
Factors that may determine whether you are classified as a trader or business include:
- Having a clear purpose or intention to make a profit
- Conducting your activity in a commercially viable way
- Believing that you will make a profit, even if it may not happen in the short term
- Operating in a planned, organized and business-like manner, including keeping business records, creating a business plan, and acquiring inventory or assets in line with your plan
- Repeating similar types of activities on a regular basis
- The transaction being part of a business operation or commercial in nature
Having a large volume of transactions, a high level of activity or a degree of sophistication does not automatically classify you as a business engaged in cryptocurrency transactions. You’ll need to evaluate your transactions against the criteria set by the Australian Taxation Office (ATO) to determine if you are carrying on a business.
If you’re in the process of setting up or preparing to start a business, you’ll need to be aware that money or property received before the business officially starts is not generally considered assessable income. Expenses incurred before the business has officially begun cannot be claimed as deductions.
Tax for Businesses in the eyes of the ATO
The Australian Taxation Office (ATO) has outlined several other considerations that may be relevant in determining whether a transaction is being carried out by a business and as such subject to different tax regulations. These include:
- The nature and identity of the entity undertaking the transaction
- The nature and scale of other activities conducted by the entity
- Whether the cryptocurrency in question has any purpose other than as an object of trade (such as being used as a medium of exchange or to access services only available on the blockchain)
- The nature, scale, and complexity of the transaction
- The length of time over which the transaction occurs
- The amount of money involved and the scale of the profit sought or obtained.
Can a Business Use Crypto?
A business may hold and use cryptocurrency assets for a variety of purposes, including:
- Carrying out a cryptocurrency-related business, such as trading, mining, or operating an exchange, in which case the assets are treated as trading stock. The cost of acquiring them is a deductible expense, and proceeds from selling them are considered ordinary income.
- Using them as a medium of exchange in the ordinary course of business, even if the business is not specifically a cryptocurrency-related business. In this case, the assets are also considered trading stock.
- As an investment, in which case the assets are subject to capital gains tax (CGT) when a CGT event occurs, and must be accounted for in the business’s net capital gains or losses.
- When using cryptocurrency assets to purchase business inputs or sell products, the business may be entitled to GST credits on purchases and may have to remit GST on sales.
Tax Responsibilities for Cryptocurrency
Cryptocurrency, also known as crypto assets, are digital representations of value that can be transferred, stored or traded electronically, including non-fungible tokens (NFTs). When you engage in any type of transaction involving crypto assets, such as buying, selling, or disposing of them, you have tax responsibilities and must keep records of all transactions
Non-fungible tokens (NFTs) are a type of digital asset that represent ownership of a unique item or piece of content, such as a digital artwork or collectible. Unlike fungible tokens like Bitcoin or Ethereum, which are interchangeable and have a fixed value, each NFT is unique and has a different value. NFTs are usually built on blockchain technology, which allows for the creation and ownership of digital assets to be recorded and tracked on a decentralized, public ledger. NFTs can be used to represent ownership of a wide range of digital assets, including artwork, music, videos, and even tweets.
1. Report disposal of crypto
When disposing of any cryptocurrency, it is important to consider the potential capital gains tax implications. This may include reporting a capital gain or loss in your income tax return.
You must report a disposal of cryptocurrency for capital gains tax purposes. This includes when you:
- Exchange one cryptocurrency for another
- Trade, sell, gift or donate cryptocurrency
- Convert cryptocurrency to a fiat currency such as Australian dollars.
Transferring cryptocurrency from one digital wallet to another is not considered a disposal as long as you maintain ownership of it. However, if your cryptocurrency holding reduces during a transfer to cover a network fee, the transaction fee is considered a disposal and has capital gain consequences.
2. Work out any CGT
To calculate your capital gain or loss, you must determine the value of your cryptocurrency purchases and sales in Australian dollars. A capital gain or loss is the difference between the:
- Cost base, which includes the purchase price and other costs associated with acquiring, holding, and disposing of the asset
- Capital proceeds, which is the amount received or the market value of the cryptocurrency at the time of disposal
If you buy cryptocurrency using Australian dollars, the amount paid is included in the cost base. If you exchange one cryptocurrency for another, the cost base is the market value in Australian dollars of the cryptocurrency at the time of the transaction.
If you have a capital loss, it can be used to offset capital gains made in the current financial year. If your allowable capital losses exceed your capital gains, you have a net capital loss. A net capital loss cannot be used to offset income such as salary or wages, but it can be carried forward to offset capital gains in future years.
3. Keep records
You’ll need to keep accurate records of all transactions related to buying, holding, and disposing of cryptocurrency assets. This includes keeping records of the date of the transaction, the value of the transaction in Australian dollars, and any other relevant information.
To maintain accurate records, it is recommended to set up a record keeping system, which can be as simple as a spreadsheet or using professional software. Additionally, it is helpful to scan digital copies of records for easy storage and access.
You’ll need to keep records for at least five years after disposing of any cryptocurrency, as per the ATO’s regulations.
If you’re buying cryptocurrency, the records you’ll need to keep are:
- receipts of transactions
- documents that display the crypto asset, the purchase price in Australian dollars, the date and time of the transaction, and what the transaction was for
- commission or brokerage fees on the purchase
- agent, accountant and legal costs
- exchange records
If you’re holding onto your crypto currency, you’ll need to keep:
- software costs related to managing your tax affairs
- digital wallet records and keys
- documents that show the date and quantity of crypto assets received via staking or airdrop
If you’re selling or disposing of your crypto, you’ll need to keep a records of:
- receipts of sale or transfer
- documents that display the crypto asset, the sale or transfer price in Australian dollars, the date and time of the transaction, and what the transaction was for
- commission or brokerage fees on the sale or transfer
- exchange records
- calculation of capital gain or capital loss
Pro Tax Tip: Certain tax implications may arise when you are affected by a “Forking” or “Airdrop” event.
With trading, selling or operating a business, it’s important to seek additional guidance and advice on the taxability of any cryptocurrency use in your business.
From reporting capital gains and losses to determining the tax implications of mining or staking, it is essential to have a clear understanding of the tax laws and how they apply to your specific situation. A tax agent has the knowledge and expertise to help you navigate the tax laws specific to cryptocurrency and provide valuable advice on how to stay compliant.