In most parts of the world, cryptocurrency is defined as a barter asset. In Australia, the tax treatment is like a CGT asset consideration. So, when you make a profit on your bitcoin and decide to sell it and convert back into Australian dollars, any profits above the first $10,000; which is tax-free; will be taxed on the gain amount at your individual tax rate.
The Australian Taxation Office ( ATO) has legally defined cryptocurrency assets as, not money, but as capital gains tax ( CGT) assets.
So, a fair comparison would be other CGT assets, such as investment property, and how this asset is taxed when you sell it for a profit. Gold and diamonds are considered commodity assets, which are treated in the same way as crypto, when they are exchanged or sold.
TAX TREATMENT FOR – INVESTORS
- If you purchase crypto assets as a buy and hold investor, it will be considered a capital cost by the ATO, which means you are not allowed to deduct the trade fee or any research or advice fees you paid, till the crypto is sold at a profit.
- The ATO considers the sale of a crypto asset a capital gains tax event, where the 50% (12 months holding discount) CGT discount applies for individuals. For super funds, the gain is assessed at the marginal tax rate of 15% on 2/3 of the gain for super accumulation members and 0% tax, for pension members.
- Crypto asset losses, ‘maybe offset against other asset gains or income
- Crypto asset losses may be carried forward so that they maybe offset against future crypto asset gains
- Expenses for acquiring crypto assets may be used to offset capital gains tax calculations, such as: brokerage costs, setup costs, wallet costs or interest on borrowings, are all expenses, which are non deductible costs each year, for investors, whereas traders may deduct these costs.
Warning: seek specialist tax advice on all cryptocurrency activities
You intend to hold this crypto asset without any intention of short-term profits, this asset will be treated as a CGT asset. If and when it is sold or exchanged for another coin at a future date, tax will apply at your marginal tax rate, which starts at 19% and averages 32% for most Australians.
TAX TREATMENT FOR – TRADERS / MINERS
The tax treatment for those who are trading and mining crypto currencies is different to investors.
The ATO states the following activities are defined as running a business
- Trading in crypto currency
- Mining crypto currency
- Crypto currency business services, i.e.: exchanges, apps, ATM’s etc
The transfer or disposal (shaping- moving from one coin to another) is considered assessable income, which notably is taxed at personal tax rates. Potentially, the expenses attributed to running a business would be tax deductible such as acquiring any mining equipment, brokerage costs, internet, subscription service fees and other costs within reason.
The transfer or disposal (shaping- moving from one coin to another) is considered assessable income at your personal tax rates. Potentially, the expenses attributed to running a business would be tax deductible such as acquiring any mining equipment, brokerage costs, internet, subscription service fees and other costs
TAX TIME RECORDS FOR CRYPTO:
You need to keep the following records in relation to your cryptocurrency Activities.
- Currency transactions:
- The Buy/Sell contract note or receipts, obtained from the exchange
- Expenses as a result of investing or trading in cryptocurrency
Staking, Lending and Airdrops
Staking is the process of parking or lending an investor/traders coins, in return for interest like payments, which are used to verify transactions on a particular coin’s blockchain miners. Similarly, lending via a crypto platform, whilst common now, staking rewards are taxable on an income basis treatment.
Security Point: note, there are many providers that require investors to give the platform access to their private keys. Given the importance of your private keys, which give you ownership and control.
According to the ATO, “Where Token holders who participate in ‘proxy staking’ or who vote their tokens in delegated consensus mechanisms, and receive a reward by doing so, also derive ordinary income equal to the money value of the tokens they receive” which is taxable.
“Some projects ‘airdrop’ new tokens to existing token or coin holders as a way of increasing the supply of tokens (for example, Pundi X and Tron). The money value of an established token received through an airdrop is treated as ordinary income of the recipient at the time it is derived and received” by the individual, according to the ATO
SUMMARY
Cryptocurrency Tax is not easy to understand. There are some exceptions to the above types of investments, but expert tax advice must be sought before engaging in these activities.
Further Reading:
https://www.ato.gov.au/Tax-professionals/TP/Cryptocurrency—investment-or-personal-use-asset/