Digital currency. Real world taxation.

As the Australian Taxation Office’s (ATO) data-matching closes in on cryptocurrency exchanges, it is prudent to understand the tax implications and ensure you are not caught out when big brother comes knocking.

Although the use and prevalence of cryptocurrency has expanded, the tax implications are widely misunderstood. Particularly given crypto comes with a reputation for being a black market and rogue operative, it is not surprising that the same theme has carried over to the application of taxation.

Will the ATO even know?

Up until recently, it has been harder for the ATO to track than other classes of investments or currencies. However, as the popularity and use of cryptocurrency grows, the ATO continues to invest resources in this space. Since April 2019, the ATO’s cryptocurrency data-matching program has collected data from back to the 2014-15 financial year, and is further expanding to collect information up to the 2022-23 financial year.

Therefore, now more than ever before, it is getting more likely that the ATO will become aware of the transactions, and ignorance is not an acceptable excuse for not declaring. Failure to report may lead to interest and penalties charged, particularly in cases of intentional disregard or non-compliance.

When are cryptocurrencies taxed?

While understanding how income tax applies may be a relatively easy concept to understand (or so we try to simplify below), the timing of when taxing is triggered has caused widespread confusion for taxpayers. So much so, that the ATO has released numerous announcements and publications clarifying the timing here, demonstrating that this must be a constant challenge!

Importantly, the common myth is that taxing only occurs when a trade in cryptocurrency is converted back into ‘normal’ currency, such as Australian Dollars (AUD).

In reality, taxing points occur every time a crypto unit (or part thereof) you hold is sold, exchanged or otherwise disposed of. This could include:

  1. Converting or exchanging for a different crypto unit (e.g. exchanging Bitcoin for Dogecoin);
  2. Exchanging or purchasing for goods or services (e.g. paying your accountant for business advisory using Ethereum); or
  3. Cashing out to ‘real’ money (e.g. converting your Litecoin for US Dollars (USD)).

In cases where an event occurs to a crypto unit that does not cash out to AUD, the taxation will apply to the AUD market value of the exchange/conversion/purchase etc instead.

As an example, to illustrate, AUD$5,000 is invested into Bitcoin. When the value of that Bitcoin is AUD$7,500, it is exchanged to purchase Dogecoin. At that point, there is no conversion of Bitcoin to AUD, it is merely ‘converted’ to Dogecoin. However, there was an AUD$2,500 increase in the market value at the point of the exchange. Therefore, taxation will apply and the AUD$2,500 will need to be reported in the taxpayer’s income tax return as income (see below for how it may be taxed).

Whilst a very simplistic example, it helps to illustrate how the taxing point applies not just on conversion to AUD.

However, it also illustrates some of the complexities that arise in this area. Notably, record keeping and tracking the AUD market values at each transaction becomes quite onerous. This is particularly true where high frequencies of transactions occur throughout the year, or where they are not converted into readily identifiable AUD figures.

How are cryptocurrencies taxed?

Once you’ve identified all the taxing points, how are these transactions taxed? While cryptocurrencies are able to be used in much the same ways as traditional currency, they are not a type of currency according to Australian taxation laws. Instead, they are treated similar to other investments for income tax purposes, such as shares.

More often than not, this means a cryptocurrency investment will be considered a Capital Gains Tax (CGT) asset. Capital gains here are taxable to taxpayers in the usual manner at their marginal income tax rate, and the general CGT discount may apply if held for longer than 12 months.

As a continuation from the above example, this would mean that at the top marginal tax rate (47%) for individuals with the CGT discount, income tax of $588 would apply on the $2,500 investment gain.

Conversely, capital losses are quarantined and likely only able to offset against other capital gains (not against ordinary income, such as wages or business profits).

Similar to share trading though, there may be situations where trading cryptocurrency may instead be deemed to be business income. This may apply where there is a high volume of trading, the units are held for a short term or for speculation, and there is a business-like method or strategy underlying the transactions. This can be a grey area, and classification here will come down to specific facts.

Where a taxpayer’s cryptocurrency trading is considered to be in the form of a business, then no CGT discount applies (though unlikely anyway as generally held short term (less than 12 months)). However, the losses in this case are able to be applied against other ordinary income (as opposed to being quarantined, as capital losses are).

There may be rare situations where crypto units are considered “personal use assets”, though we suggest taking caution here as it is likely to be the outlier rather than the norm. If the facts dictate it to be for personal use, then tax exemptions may apply where the cryptocurrency is acquired for less than AUD$10,000 in total.

Learn more

Investors should keep in mind that this is an ever-evolving space, so those considering cryptocurrencies should ensure they understand the relevant tax implications.

If you would like to know more about the tax implications of cryptocurrency or require assistance please contact Murray Howlett or your Pilot advisor on (07) 3023 1300.