Cryptocurrency is now under the ATO’s spotlight due to a surge in new investors during the pandemic. It is easy to get caught up in the digital gold rush and find yourself a bit lost at tax time.

ATO records show that over 600,000 Australian taxpayers have invested in cryptocurrency, with the numbers continuing to rise. Since 2019 the ATO have collected data from cryptocurrency trading platforms to ensure taxpayers are correctly disclosing their transactions.

It is important to note that a taxable event occurs anytime Cryptocurrency is exchanged, traded, sold, gifted, spent or converted. This includes between different types of cryptocurrencies, not simply when cryptocurrency is exchanged back into fiat currency (such as Australian or American dollars).

As a cryptocurrency investor (much like a share investor), calculating the capital gain or loss when a taxable event is triggered is the difference between the:

  • Cost base = the market value of the cryptocurrency in Australian dollars when acquired, plus certain other costs associated with acquiring, holding, and disposing of it, and;
  • Proceeds = the market price of the cryptocurrency in Australian dollars when sold.

The ATO requires the following records be kept in relation to cryptocurrency transactions.

  • Date of each transaction.
  • The market value in Australian dollars of each transaction (may be taken from a reputable online exchange).
  • Details of associated expenses.
  • What the transaction was for and who the other party was (ie. their cryptocurrency address)

Investors are not the only type of cryptocurrency traders. There are 3 distinct categories– Investing, Business use, and Private use. Each have different tax implications.

Categories of Cryptocurrency users: Definition:  Tax Treatment: Rules:
Investing: Entities who buy, hold, and sell cryptocurrency with the intention to make a profit from currency conversion. Capital Asset – Capital Gains Tax. The cryptocurrency is considered a capital asset, similar to shares or real-estate.

 

Cryptocurrency held for longer than 1 year is eligible for the 50% CGT discount and taxed on only 50% of the total gain after subtracting losses.

 

If you make a capital loss, you cannot claim it against your ordinary income, but you can use it to reduce other or future capital gains.
Business use: Entities that hold and use cryptocurrency as part of running a business. (For example: accepted as a form of payment).

 

Cryptocurrency mining may also be considered running a business.

 Trading Stock – Ordinary Income Tax. Cryptocurrency is considered trading stock when used in a business.

 

If your business accepts a payment in the form of cryptocurrency, it must be recorded in AUD as part of your ordinary income. (The value in AUD will be the fair market value as per a reputable cryptocurrency exchange).

 

Purchases made using cryptocurrency are deducted based on the market value of the item acquired.

 

If mining cryptocurrency, expenses incurred (such as electricity) are allowable deductions. Hardware & software purchases may be claimed via depreciation.
Private use: You personally made a purchase of crypto in order to buy a product or service online with no intention to hold to make a profit. Private – Tax exempt. Original purchase of cryptocurrency must be less than $10,000.

 

The cryptocurrency is used, or intended to be used, to purchase goods and services of a private nature.

 

It is recommended you maintain records and hold onto any invoices as proof of private use.
Trader: An entity that frequently buys/sells/trades cryptocurrency with a view to profit from the fluctuations in price. Trading Stock – Ordinary Income Tax. The change in value of cryptocurrency is assessable (if increased) or deductible (if decreased).

 

No CGT discount applies.
Miner (not in business): An entity that mines cryptocurrency however not in the form of a business. Capital Asset – Capital Gains Tax. The cryptocurrency is considered a capital asset, similar to shares or real-estate.

 

The cost of mining will form part of the cost base of the resulting cryptocurrency.

 

Cryptocurrency held for longer than 1 year is eligible for the 50% CGT discount and taxed on only 50% of the total gain after subtracting losses.

 

If you make a capital loss, you cannot claim it against your ordinary income, but you can use it to reduce other or future capital gains.