New rules requiring that cryptocurrency exchanges sign up to the Digital Currency Exchange Register, and have transactions exceeding $10,000 reported to anti-money laundering and financial crime watchdog AUSTRAC (in line with existing rules for cash transactions and bank transfers), have come into effect today, and this is big news for investors.
Tax partner at HLB Mann Judd Peter Bembrick explained that the regulations mean cryptocurrency transfers are more likely to receive ATO scrutiny. This in turn means investors will need to be able to explain where the money came from, and that they are following the tax office’s rules.
“There are a number of areas that may catch people by surprise, if they haven’t done their research,” he said.
“It’s never a good idea to fall foul of the ATO and, as always, ignorance of the rules is not considered an adequate defence for failing to pay the appropriate tax.”
With this in mind, Mr Bembrick highlighted the six areas investors need to be aware of:
1. It’s not a currency, really
Given that the ATO does not consider cryptocurrencies like bitcoin actual currencies, instead categorising them as assets for tax purposes, their fluctuating dollar price has tax consequences.
Mr Bembrick explained, “As with other investments, the exact nature of the tax implications will depend on the taxpayer’s related activities as well as their intention when they acquired the cryptocurrency.”
2. Investors are exposed to capital gains tax
As with any investment, investors are liable for capital gains tax, and any gains or losses must be recorded on personal tax records.
“For Australian residents who have held the cryptocurrency for at least 12 months, a 50 per cent CGT discount can be claimed, meaning they only pay CGT on half of the actual gain,” Mr Bembrick said.
“Just like other investments, be aware that the ATO may treat some investors as a 'trader' or 'speculator'.
“This means that, if the purpose of buying and selling cryptocurrency was for short-term profit rather than long-term capital growth, then any gains would simply be taxed as personal income, without any access to the CGT discount and without the ability to offset any capital losses from other investments against the cryptocurrency gains.
“The only good news is that trading losses can be offset against other types of income.”
3. A ‘personal use’ exemption isn’t out of the question
A personal use asset, like a car or holiday home is protected from CGT if it’s less than $10,000, Mr Bembrick noted.
As such, the ATO will allow the “personal use” exemption for cryptocurrencies provided the cryptocurrency is used purely to hold and exchange for other goods and services, and without the intention of making a profit.
4. You still need to keep solid records
This means cryptocurrency-holders need to record the dates and values of purchases and sales, the identity of the other party and the nature and purpose of any transaction.
“As cryptocurrency such as bitcoin is generally traded on an exchange, and by its very nature the transactions will be recorded electronically, obtaining and retaining records of the first three items should not be too difficult,” Mr Bembrick said.
“With the nature and purpose of the transaction, in some cases this will be more obvious than others, but this will be the area most open to ATO interpretation, so it is critical to properly document intentions from the outset.”
5. Payments made in cryptocurrency are taxable
As with any other form of payment, payments made in cryptocurrencies are taxable, with the taxable amount the Australian dollar value of the goods or services at the time of transaction.
“Similarly, if cryptocurrency is used to pay for goods and services in the course of carrying on a business, the AUD value of the payment would be treated for tax purposes in the same way as if you had paid the equivalent amount in cash,” Mr Bembrick said.
6. Mining cryptocurrency is not a tax-free adventure
The ATO generally treats cryptocurrency mining, or similar activities, as a business, with the value of assets acquired marked as assessable income.
As such, any direct costs, like energy or equipment depreciation should also be tax deductible, Mr Bembrick said.