Tax Obligations for Cryptocurrencies – Bitcoin Boom
Bitcoins are form of online cryptocurrency which is taking the digital world by storm. Countless media outlets have reported the sharp rise in value of bitcoins and countless more have speculated a bubble. Bitcoin has risen to popularity so fast that a spike last year meant a single bitcoin was more valuable than an ounce of gold. With so much happening in the realm of cryptocurrencies, it would be easy to get caught up in the frenzy and forget to consider the tax obligations surrounding bitcoin.
Interestingly, despite being labelled a ‘currency’, the Australian Tax Office (ATO) doesn’t view bitcoin as money, nor do they consider purchases made with bitcoin to attract GST. However, it is important to be aware that bitcoin is considered an asset when calculating capital gains tax (CGT). As Bitcoin is a CGT asset for the purposes of tax law, investors must be aware of their tax obligations.
What is a ‘CGT asset’?
A CGT asset is broadly defined in taxation law:
Income Tax Assessment Act – Section 108.5
(1) A CGT asset is:
(a) any kind of property; or
(b) a legal or equitable right that is not property.
(2) To avoid doubt, these are CGT assets:
(a) part of, or an interest in, an asset referred to in subsection (1);
(b) goodwill or an interest in it;
(c) an interest in an asset of a partnership;
(d) an interest in a partnership that is not covered by paragraph (c).
This definition is difficult as it doesn’t make any distinction between tangible property (such as land) and intangible property (such as bitcoins). This makes things a little confusing when working out tax obligations.
When is CGT payable?
A taxpayer may be liable to pay tax if they make a capital gain when a CGT event takes place. Common examples of CGT events are disposal of a CGT asset or cancellation or surrender of a CGT asset. This includes the resale of bitcoin.
The CGT provisions will apply if a person purchases bitcoin for investment (and is not carrying on a business of bitcoin investment). Any profit made from the resale of the bitcoin will be assessable as a capital gain. If a loss is made, this can be used to offset any capital gains made in that year. If capital losses exceed capital gains in a taxation year the taxpayer may be able to claim a tax deduction.
What are the exceptions or discounts?
The most prominent discounts and exceptions that apply to bitcoin are as follows:
In general, a 50% CGT discount will apply for Australian resident individuals and trusts if the bitcoin has been held for more than 12 months.
Exception – ‘personal use asset’
If bitcoin is purchased with the intention of buying goods for personal consumption (e.g. retail goods or food), and the original cost of the bitcoin was under $10,000, any gain will be a tax free ‘personal use asset’.
For example, Darren purchases $2,000 worth of bitcoin. This investment quickly appreciates to $18,000. In this scenario, if Darren uses the bitcoin he gained to purchase personal items, then the $16,000 gain will be tax free. However, if Darren’s original purchase of bitcoin exceeded $10,000, then each time he uses bitcoin to purchase items (or other cryptocurrency) it will be considered a disposal for the purposes of CGT. Similarly, if Darren withdraws the bitcoin in Australian currency from a Bitcoin ATM, it will be considered a disposal.
What happens if you receive bitcoin as payment for goods and services?
Bitcoin can be used as payment for goods and services. In fact, a Victorian home owner recently announced that they would accept Bitcoin as payment for their $2.5 million home. If a business receives Bitcoin as payment for goods or services, the Australian dollar value of the cryptocurrency will need to be included in the assessment of the ordinary income of the business. In these circumstances, a business may also be charged GST on the bitcoin payment.
Tax smart tips for cryptocurrencies
- If you are, or are planning to deal in cryptocurrencies for whatever purpose, make sure you keep records of all your transactions to ensure you are in a good position if the ATO queries your tax obligations.
- Monitor your actions. Even if each transaction you make is less than $10,000, if there is a buying pattern that suggests you intend to make a profit, there is a chance that any gain could be taxable as income.
- If you’re thinking of investing in bitcoin, make sure you educate yourself. Remember it’s not just about what you invest in but also how you go about it. The best way to start is by familiarising yourself with your tax obligations.
Want to know more about tax obligations? Looking for an experienced solicitor in Newcastle, Sydney or the Hunter to advise you on Tax Law and Disputes? Call us on (02) 4929 7002, email us or complete an enquiry form.