A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes cryptocurrencies almost impossible to counterfeit. The most popular cryptocurrency is bitcoin. Many cryptocurrencies are decentralised networks based on blockchain technology (a distributed ledger enforced by a disparate network of computers). The cryptocurrency functions outside of the traditional banking and government systems.
The Australian Taxation Office (ATO) has issued a few tax rulings in relation to tax treatment of cryptocurrencies. In summary, a bitcoin (and other cryptocurrencies) under Australian tax law is:
- a Capital Gain Tax (CGT) asset;
- a trading stock when the bitcoin is held for the purpose of sale or exchange in the ordinary course of a business;
- not a foreign currency for income tax purposes – foreign exchange currency rules are not subject to cryptocurrency; and
- a Fringe Benefit if the bitcoin is supplied by an employer to their employee.
CGT versus Income Tax Implications of Cryptocurrencies
The disposal of cryptocurrencies to a third party gives rise to a CGT event. However, any gain made by a taxpayer is reduced by an amount that is included in the taxpayer’s assessable income under another provision of the tax law.
If the cryptocurrency is treated as a personal use asset (a CGT asset used or kept mainly for personal use or enjoyment), any capital gain over the disposal of this asset is disregarded if the cost base (purchase price) of the asset is $10,000 or less. Moreover, any capital loss made on disposal of such an asset is also disregarded.
However, if the cryptocurrency is not treated as a personal use asset, a gain made on the disposal of the cryptocurrency can be treated as a capital gain or as ordinary income. The factors necessary to consider whether such a disposal should be subject to CGT or income tax law provisions are as follows:
- the amount of money involved in the mining (acquisition) and disposal of the cryptocurrency;
- the magnitude of the profit sought or obtained on that disposal;
- the length of time before the cryptocurrency is held before disposal; and
- whether the cryptocurrency has no other immediate use other than as object of trade.
For example, where a taxpayer mines a small amount of cryptocurrency as a hobby and after few years decides to sell the bitcoin for a small profit in order to purchase a more stable investment item, the gain will be assessed under the CGT provisions, and not as ordinary income. In addition, if the cryptocurrency was used to purchase an investment, the capital gain will not be disregarded because the cryptocurrency will not be treated as a personal use asset.
However, if a taxpayer acquires a cryptocurrency with the purpose of profiting from the disposal of the cryptocurrency, a gain made on its disposal will be assessable under income tax law provisions and the CGT will be reduced accordingly.
The ATO collects data from cryptocurrency designated service providers to identify individuals or businesses who may have or may be engaged in buying, selling or transferring cryptocurrency from the income year ended 30 June 2015. Therefore, cryptocurrency owners or traders are required to maintain records in relation to their holdings, as follows:
Digital currency owner details
c. Australian Business Number
d. Date of birth
e. Contact numbers (fixed line, mobile)
f. Email address
g. Social media account (Facebook, Twitter, Reddit etc.)
Account and transaction details
h. Status of account (open, closed, suspended, lost etc.)
i. Linked bank accounts
j. Wallet address associated with account
k. Lost or stolen (crypto)currency amounts linked to accounts
l. Unique identifier
m. Transaction date
n. Transaction time
o. Type of (crypto)currency
q. Type of transfer
r. Transfer description
s. Total account balance