As the Australian Taxation Office’s (ATO) data-matching closes in on cryptocurrency exchanges, it is prudent for medical practitioners who have invested in cryptocurrency to understand the tax implications and ensure you are not caught out.
Will the ATO know?
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 more likely the ATO will become aware of the transactions, and ignorance is not an acceptable excuse for not declaring income related to cryptocurrency exchanges. Failure to report income may lead to interest and penalties charged, particularly in cases of intentional disregard or non-compliance.
When are cryptocurrencies taxed?
The most common myth around tax on cryptocurrency is that the point of taxation only occurs when a cryptocurrency is converted back into Australian Dollars (AUD).
In reality, taxing points occur every time a cryptocurrency unit you hold is sold, exchanged or otherwise disposed of. This could include:
- Converting or exchanging for a different cryptocurrency unit (e.g. exchanging Bitcoin for Dogecoin);
- Exchanging or purchasing for goods or services (e.g. paying a supplier for medical equipment using Ethereum); or
- Cashing out to ‘real’ money (e.g. converting your Ripple to US Dollars (USD)).
In cases where an event occurs to a cryptocurrency unit that does not cash out to AUD, the taxation will apply to the AUD market value of the exchange/conversion/purchase etc.
How are cryptocurrencies taxed?
While cryptocurrencies can 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, such as shares, for income tax purposes.
As a result, a cryptocurrency investment will be considered a Capital Gains Tax (CGT) asset. Capital gains are taxable at a taxpayer’s marginal income tax rate, and the general CGT discount may apply if the cryptocurrency unit has been held for longer than 12 months.
Conversely, capital losses are quarantined and are only able to offset against future capital gains.
Similar to share trading, 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 and there is a business-like method or strategy underlying the transactions. The difference between being an investor compared to a trader can be a grey area.
Where a medical practitioner is deemed to be a cryptocurrency trader, no CGT discount applies, however, losses are able to be applied against other ordinary income (such as salary and private practice income).
It is important for medical professionals investing in cryptocurrency to understand the tax implications and to maintain detailed records of transactions in order to be prepared properly for tax time.
Medical practitioners should also consider how to structure cryptocurrency investing or trading and whether it may be best to hold cryptocurrency through an entity, rather than personally due to asset protection risks.
Should you have any questions regarding cryptocurrency taxation, please contact Kristy Baxter or Angela Stavropoulos from Pilot’s medical services division on email@example.com or (07) 3023 1300.