Cryptocurrency: What is it and how is it taxed?
Australian Baseball Team Perth Heat made headlines when it announced it will give players and staff the option of being paid in Bitcoin. The article outlines their plans to account for fluctuating cryptocurrency prices, as well as the anticipated benefits, like an increased ability to attract international talent. It doesn’t, however, talk about the tax implications of trading in cryptocurrency. In this blog post, we’ll outline what cryptocurrency is and how it is taxed.
What is Cryptocurrency?
Cryptocurrencies are a type of digital currency that derive their value from the market. They do not physically ‘exist’, instead they rely on technologies (like blockchain) to record transactions and complex code algorithms (called cryptography) to secure the currency in a digital ‘wallet’.
Since cryptocurrencies are not linked to any physical asset or government, any number of cryptocurrencies can exist at any moment in time. Some cryptocurrencies are well known, like Bitcoin, Ethereum, and Dogecoin, but thousands of others exist.
You can read an explainer on cryptocurrencies on the RBA website here.
Personal Tax for Cryptocurrency Transactions
When you invest in cryptocurrency personally (not for business purposes), your disposal of the cryptocurrency may be subject to Capital Gains Tax (CGT). To calculate the value of your capital gain, simply subtract the amount you paid for the cryptocurrency (including fees and other costs) from the amount you ultimately received for the cryptocurrency when you disposed of it.
You may need to pay CGT if you:
- Sell your cryptocurrency.
- Give your cryptocurrency as a gift to another person or business.
- Trade or exchange your cryptocurrency (including if you trade or exchange it for another cryptocurrency).
- Convert your cryptocurrency.
- Use cryptocurrency to pay for goods or services.
If you hold your cryptocurrency for 12 months or more, you may be entitled to a CGT discount. Additionally, if you make a net capital loss from your cryptocurrency transactions (where you lose money from your investment), you can use it to reduce a capital gain you make in a later year.
It’s important that you keep records of your cryptocurrency transactions to determine your CGT obligations.
Taxation of Cryptocurrency Used in Business
There are tax consequences of acquiring or disposing of cryptocurrency, whether you do so personally or in the course of business. The exact consequences do vary depending on your circumstances, so we recommend working with an accountant if you are uncertain. On that note, the information below is general in its nature and should not be considered advice about your personal circumstances.
Taxation of Cryptocurrency Businesses
If your business is a cryptocurrency business then trading stock rules apply to those transactions – not the CGT rules. A business might be a cryptocurrency business if it engages in transacting with cryptocurrency or holding cryptocurrency for sale or exchange in the ordinary course of business, like cryptocurrency trading or mining businesses, for instance.
Cryptocurrency as a Payment Method
However, if your business is not a cryptocurrency business but you accept cryptocurrency as payment for your goods or services, you need to account for the value of the cryptocurrency as business income.
To do this, you need to determine the fair market value of the cryptocurrency in Australian dollars. This (typically) requires reputable online software, known as cryptocurrency calculators. The reason for this is that calculations related to cryptocurrency transactions are complex, and best achieved by purpose-built software. The Crypto Tax Calculator is one such program.
Paying Salary or Wages in Cryptocurrency
Salary or wages paid in cryptocurrency are a fringe benefit, which means employers are subject to the provisions of the Fringe Benefits Tax Assessment Act 1986. Where no salary sacrifice agreement exists, employers will need to meet Pay As You Go (PAYG) obligations. These should be calculated using the Australian dollar value of the cryptocurrency.
Other Commercial Transactions using Cryptocurrency
Generally, if you make a profit on the disposal of cryptocurrency as part of a business you carry on, they will be assessable as ordinary income and not a capital gain, including where you:
- Invest in cryptocurrency with the hope that it will increase in value.
- Transfer from one cryptocurrency to another.
- Exchange cryptocurrency for cash.
There will also be tax consequences for gifting cryptocurrency to another person or business and using cryptocurrency to purchase goods or services.
Please bear in mind that there are crypto-scammers who offer investors fake opportunities to buy cryptocurrencies or who offer to pay with fraudulent cryptocurrency. You can read more about these common scams on the Money Smart website here.
The ATO’s Record-Keeping Requirements
The ATO requires businesses to keep the following records for cryptocurrency transactions:
- The date of the transactions (including acquisition and disposal).
- The value of the cryptocurrency (in Australian dollars) at the time of the transaction.
- What the transaction was for and who the buyer/seller was.
To meet your obligations you should keep receipts related to the purchase or transfer of cryptocurrency. These records include exchange records, professional services costs, digital wallet records and keys, and software costs. You should record the costs of any cryptocurrency tax calculator software.
If you need assistance determining your tax obligations related to a cryptocurrency transaction or you want more information about the pros and cons of using cryptocurrency in your business, get in touch.
