We may not understand the dynamics of how cryptocurrency works (very few do), but the last few days and weeks have highlighted the volatility of the cryptocurrency market. Whilst we are not economists and cannot explain how a couple of tweets can cripple the crypto market, we are well placed to advise you on the tax ramifications of buying and selling cryptocurrency.
Broadly, like other assets such as property, there are three main ways cryptocurrencies may be taxed:
- Under the Capital Gains Tax (CGT) regime as a CGT asset (i.e. if it’s an investment);
- On revenue account as trading stock if you are a cryptocurrency trader; or
- On revenue account as a revenue asset if you purchased the cryptocurrency with a profit-making intention.
Investment - CGT
Most individuals would generally hold the cryptocurrency as a CGT asset. A key characteristic is the intention to hold the cryptocurrency as an investment for the long-term. CGT assets are subject to the CGT regime. If you held on to the cryptocurrency for more than one year, you would receive a 50% CGT discount on any subsequent gains (if any). Conversely, if you recognised a loss from your investment, the loss would be considered a capital loss which can only offset current year (or future) capital gains. There are exceptions to the rule where it can be shown that the cryptocurrency is a personal use asset – those assets costing less than $10,000 used for personal use or consumption – however, this would be a rare occurrence.
Revenue Account - Cryptocurrency trader
Whilst not many would fall into this category, cryptocurrency gains and losses may be assessable on revenue account as trading stock if you are in a business of trading cryptocurrency. Carrying on a business of trading cryptocurrency is a matter of fact and you would need to consider the following questions in determining whether you carry on a business:
- Does the activity have a significant commercial purpose or character?
- Does the taxpayer have more than a mere intention to engage in business?
- Is there an intention to make a profit or a genuine belief that a profit will be made? Will the activity be profitable?
- Is there repetition and regularity in the activity? (i.e. how often is the activity engaged in? How much time does the taxpayer spend on the activity?)
- Is the activity of the same kind and carried on in a similar way to that of the ordinary trade?
- Is the activity organised in a businesslike manner?
- What is the size or scale of the activity?
- Is the activity better described as a hobby, a form of recreation or a sporting activity?
As a cryptocurrency trader, gains on the sale of the trading stock are assessable in full (and not eligible for the 50% CGT discount), and any losses may be deductible against the taxpayer’s assessable income during the year. There is the ability for some tax planning as the trading stock can be valued at cost, market or replacement value. For example, if the value of Bitcoin falls, the Bitcoin could be valued at market value so that the losses from the Bitcoin could be potentially offset against other gains.
Carrying on a business is a ‘high bar’, and in most cases, speculators or investors would not be carrying on a business of cryptocurrency trading.
Revenue Account - Profit making intention
If you acquire cryptocurrency with the intention of making a short-term profit and are not a cryptocurrency trader or holding the cryptocurrency as CGT asset, the cryptocurrency is likely to be held as a revenue asset.
As a revenue asset, gains on the disposal of the cryptocurrency are assessable in full (and not eligible for the 50% CGT discount) and any loss would also be considered a revenue loss. A key difference between trading stock and revenue assets is the ability under the trading stock provisions to value the trading stock at cost, market or replacement value.
The following are general indicators of a revenue transaction with a profit-making intention:
- The nature of the entity undertaking the operation or transaction.
- The nature and scale of other activities undertaken by the taxpayer.
- The amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained.
- The nature, scale and complexity of the operation or transaction.
- The way the operation or transaction was entered into or carried out.
- The timing of the transaction, or the various steps in the transaction.
Whether an asset is on capital account or held for a profit-making intention comes down to the facts of each situation. This however, is an area the Australian Taxation Office (ATO) consistently focus on in their tax reviews/audits. It is important to note, that if there were any ‘quick’ gains, the ATO may treat this as assessable income under these provisions.
The following example from Taxation Ruling (TR) 92/3 could equally apply to cryptocurrency trades:
78. Mr Goldfinger purchased a number of gold bars for $100,000 and, following a sharp rise in the price of gold, sold the gold bars one week later for $110,000. Goldfinger did not carry on a business and had no previous dealings in gold.
79. The profit of $10,000 is income and assessable under subsection 25(1). It can be inferred from the objective circumstances (especially the quick sale following a rise in price and the fact that the asset had no immediate use other than as an object of trade) that profit-making was a significant purpose of Goldfinger in acquiring the gold bars. Furthermore, the substantial amounts of money involved and the nature of the asset traded lead to the conclusion that the transaction was commercial in nature.
Mining cryptocurrency
Tax implications for mining are more complicated to what is explained above. In particular, a taxable event may arise when the cryptocurrency is mined. It may be considered assessable income and subject to the trading stock provisions depending on whether the mining activities are considered a business. Trading stock adjustments may apply if the cryptocurrency is later held by the taxpayer as a CGT asset.
In conclusion
The ATO have significant data matching capabilities, and this will definitely be an area of focus for them. If you do not report the income from the disposal of any cryptocurrency transactions, it is likely that you may be reviewed/audited by the ATO at a later date.
If you would like to find out more, or would like to discuss your circumstances, please contact your local Moore Australia advisor.