In the past, the cryptocurrency market has been a bit like the wild west, with plenty of hacking, scammers and thieves trying to convince people to part with their money. As cryptocurrency is becoming more mainstream, regulations are forming around the asset class and authorities are warning that they’re catching up with the digital world.
As the market is sorting itself out, you may have noticed that AUSTRAC is now regularly popping up as a key selling point for exchanges that are both Australian owned as well as those that are foreign-owned and choose to operate here. AUSTRAC is the Australian government department for monitoring the flow through our financial system. To keep operating in Australia, an exchange provider must register with AUSTRAC, abide by their regulations and seek renewal on a three-yearly basis. AUSTRAC share their data with the ATO, so if you think you can get away with pocketing that big Bitcoin profit that you made in the past year, there is a good chance that the ATO already knows about it.
Cryptocurrency is taxed depending on whether you’re an investor or trader, as well as how you own your cryptocurrency. With tax time just around the corner and cryptocurrency on the radar of the ATO, we share what you need to know about how cryptocurrency is taxed in Australia.
Taxation for cryptocurrency investors
Cryptocurrency investors will fit into two categories – investor or trader. The ATO provides clear guidelines on which is which.
If you invest in a coin, you are holding the asset with the promise of a future gain. Even if you buy and sell regularly, if you do so to grow wealth and have other forms of income, it’s likely that the ATO will consider you to be an investor. If, as an investor, you mine for coins, then your purchase price is considered to be zero, meaning you’ll make a 100% profit when you sell them.
As an investor, you are taxed on:
- Your profit from selling any coins, based on the sale price, minus the cost price and any exchange fees.
- If you have owned the coin for less than 12 months, this amount is applied to your taxable income in your tax return as additional income
- If you have owned the coin for greater than 12 months, it is considered a capital gain and half of the gain is added to your income in your tax return
As an investor, you can claim tax deductions on:
- The cost of acquiring your coins – but only by taking that cost off any gain when you sell
- Interest charges if you borrow money to invest
- Any professional advice for the management of your coins
- Tax advice relating to investing in cryptocurrency
Taxation for cryptocurrency traders
If you’re a trader, things are somewhat different. A trader is just that – someone whose trade is cryptocurrency. In this case, the buying and selling of coins represents an income rather than a capital gain. It should be the main source (but does not have to be the sole source) of income and you should be doing it regularly and consistently. As it is considered a trade, your activities are treated differently from those of investors.
As a trader, you are taxed on:
- Your profit from selling any coins which is the sale price minus the cost price
- 100% of this profit is treated as income without any discounts
As a trader, you can claim deductions on:
- All exchange and trading fees, when you pay them (rather than as part of your cost base when you sell)
- Normal businesses expenses incurred in the running of your trading business, including, but not limited to:
- Rent for your office (either designated office or home office)
- Office utilities
- Professional fees
- If you mine cryptocurrency, costs related to the mining of coins including equipment, maintenance and electricity
Keep in mind, before you go out and buy a mining rig to mine some coins and claim big tax deductions, that all coins that you gain from mining are instantly taxable when you get them. Further, if you incur large costs to start your cryptocurrency trading business, you may not be able to offset your costs against other forms of income until you can show that you’re genuinely running a business.
How do you hold your cryptocurrency?
As cryptocurrency is considered an asset class, many people may not be aware that you can hold your cryptocurrency in a number of different structures.
Examples of ownership structures include:
- In your own name
- In a company
- Inside your superannuation fund
- Through a family or discretionary trust
Many people start buying crypto for fun and start to take it more seriously either as funds permit or if the value of their holdings increase sufficiently for them to really pay attention. It’s a delicate balance between building the right ownership structure early (and incurring the costs) or sitting on a huge gain and wishing that you didn’t have to pay up to 47% tax on your earnings.
As an example, if you’re above 60 and buy your coins in a super fund, it’s possible you could pay no tax at all, regardless of the size of the gain. Or if you’re younger, a trust would allow you to both protect the asset as well as distribute the gains to other members of your family.
Seek professional advice
When it comes down to it, cryptocurrency is now considered a regular (if very volatile) asset by the ATO. Increasingly, it’s more regulated, tracked and recorded. Gone are the days of ambiguity around coins just being a digital currency instead of an asset.
As always, seek professional advice with your tax affairs if you’re uncertain. That way, you avoid penalties with the ATO, take advantage of any deductions you’re entitled to and set up the best ownership structure for your situation.
If you haven’t previously declared gains on your trades, consider amending your previous returns to ensure that you’re not penalised in the future for failure to declare. The ATO understands that people can make mistakes and are very approachable if you make the first move.
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