What are crypto tax obligations?
Before we get to what your crypto tax obligations are, let’s see what cryptocurrencies are?
Cryptocurrencies are digital or virtual tokens that use cryptography for security. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009.
Once again, surging in popularity, cryptocurrencies have a unique tax treatment that every taxpayer dealing with cryptocurrency should be aware of.
It’s been more than 13-years since the advent of bitcoin, and the term “cryptocurrency” entered the public consciousness. However, neither bitcoin nor the many thousands of cryptocurrencies that have followed have become widely used for payments by the general public. Instead, people are more likely to use cryptocurrencies as a speculative, high-risk investment class.
However, the pandemic has prompted a marked increase in consumer investment. The ATO has followed this development with warnings of a “crypto compliance” crackdown this tax time — so it will pay to be careful.
Cryptocurrency is essentially a digital representation of value that is neither issued by a central bank nor a public authority and is usually not attached to a national currency. Cryptocurrency can be transferred, stored or traded electronically.
There are many ways of acquiring cryptocurrency, and below are just a few ways. Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
Earing cryptocurrencies
Mining
One way to earn cryptocurrency is through mining. This process involves using high-powered computers to solve complex mathematical problems to verify digital transactions. When a transaction is verified, a new “block” of data is added to the blockchain, and the miner who solved the problem is rewarded with a certain amount of cryptocurrency.
Trading
Another way to earn cryptocurrency is through trading. This can be done by buying and selling cryptocurrencies on exchanges or participating in margin trading. Margin trading allows traders to borrow money from a broker in order to trade with leverage. This can be a risky strategy, but it can lead to large profits if done correctly.
Staking
Staking is when users lock up their cryptocurrency to earn interest in it. This is usually done by setting up a “node” or a computer that helps to verify transactions on the network. The staker earns a portion of the transaction fees in return for verifying transactions.
Lending
Cryptocurrency lending is a newer way to earn interest on your holdings. Numerous platforms allow users to lend their cryptocurrency to others in exchange for interest payments. This can be a risky proposition, but it can be a great way to earn passive income if done with caution.
Providing goods and services in return for cryptocurrency
This is perhaps the most “traditional” way of earning cryptocurrency. Simply put, if you have goods or services that you can provide, you can offer to accept payment in cryptocurrency. This is becoming increasingly common as more and more businesses are beginning to accept cryptocurrency as payment.
Buying and selling NFTs
NFTs are non-fungible tokens that are unique digital assets and can’t be replaced. They have gained popularity in recent months due to their scarcity and the fact that they can be used to represent ownership of digital or physical assets. You can buy and sell NFTs on platforms such as opensea.io
Playing video games
You can now earn cryptocurrency by playing certain video games. The game developers will insert code into the game that will pay you a small amount of cryptocurrency for each action you take within the game. This is a new and innovative way to earn crypto, and it only becomes more popular in the future. Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
But broadly, what is the tax treatment of this form of currency?
Capital gains
Cryptocurrency is generally defined as a CGT (Capital Gains Tax) asset. The sale or gift of cryptocurrency to a third party may result in what the ATO classifies as a “CGT event.” Disposals can include selling or giving the cryptocurrency, trading or exchanging it, converting it to Australian dollars, or using it to purchase anything.
When the proceeds from the sale of cryptocurrency exceed the initial cost basis, a capital gain is generated. The capital proceeds from the disposal of cryptocurrency are defined as the money or market value of any other property received due to the transaction. The principal component of the cost basis is the sum of money paid or the market value of any other property given by a buyer in order to acquire that cryptocurrency. The following example states that the general 50% CGT exemption might apply if the currency is kept for at least 12 months Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations..
Cryptocurrency as an investment
Juliet spent $12,500 in September 2019 to buy 300 cryptocurrencies. In October 2000, after trading 150 of his coins for 200 coins on a different cryptocurrency exchange, Juliet invested the equivalent amount in another type of coin. The exchange rates at the trade moment resulted in a market value of $10,000 for the 200 coins. The total capital gain will be $3,750 ($10,000 minus half $12,500). Because the currency was sold after having been held for 12 months or more, the gross capital gain is reduced by 50%,
When a cryptocurrency can’t be valued, the money generated by its disposal is calculated utilizing the market value of the cryptocurrency disposed of at the time of the transaction.
It’s worth noting that, as with stocks, a bitcoin’s value fluctuates while a taxpayer holds it. There was no “disposal,” which did not result in a capital gain or loss. Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
Personal use asset
A capital gain made from a “personal use asset” is disregarded under CGT tax rules if the first element of the cost base is $10,000 or less. Furthermore, any capital loss incurred on a personal use asset is ignored. These criteria apply equally to cryptocurrency, and at the time of its disposal, the cryptocurrency must be considered.
Personal cryptocurrency holdings where it is kept or used to purchase items for personal use or enjoyment, such as clothes or music, are examples.
However, this personal usage exemption does not apply where the cryptocurrency is kept or used mostly for commercial gain (to be sold or exchanged at a later time when the value has increased) or to ease purchases or sales in the course of conducting business. Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
Assessable income?
The fact that the cryptocurrency is not considered a personal use asset may be irrelevant. If the cryptocurrency is not a capital asset, disposal of it may be regarded as ordinary income.
This might apply if you buy a cryptocurrency as part of your business, through wages or salary, or via a task like mining that generates assessable income.
Even if you are discovered to have sold the cryptocurrency,
The ATO follows a similar logic in the case of an isolated transaction that is not part of a company operation. When the taxpayer’s objective or purpose in entering into the transaction was to generate a profit or gain, it is generally considered ordinary income. Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
Factors to consider in determining whether an individual transaction qualifies as a commercial deal include:
- The nature of the entity performing the transaction
- scale of activities
- The amount of money at stake
- transaction’s natures, scales, and intricacies
- how the operation or transaction was carried out, including the employment of intermediaries or professional advisers, and
- The costs and fees incurred as part of the transaction or any of its stages.
Trading stock?
In certain cases, cryptocurrency can be considered “trading stock,” which will be treated as such where:
- It is owned by a taxpayer who is engaged in the business of bitcoin mining and selling, or
- a taxpayer is carrying on a cryptocurrency exchange business, or
- Any company that sells items and uses cryptocurrency in the ordinary course of business is considered a vendor.
The sale proceeds from cryptocurrency held as trading stock in a company are taxable, and the expense of obtaining crypto kept as trading stock is deductible. The CGT rules do not apply.
Foreign currency gains or losses
The tax code contains definitions for recognizing foreign currency gains and losses for income tax purposes. The Australian Taxation Office has long held that bitcoin and other cryptocurrencies can’t create foreign currency gains or losses because they aren’t considered “foreign currencies” under the current law. High-level court rulings have also concluded that bitcoin and other cryptocurrencies are not a currency or money.
While the current law may change in the future, it appears that for now, any gains or losses made on cryptocurrency held as an investment will be considered a capital gain or loss subject to CGT rules. If you use cryptocurrency to purchase goods or services from a foreign country, any resulting gains or losses would likely be treated as ordinary income. Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
Record keeping
Taxpayers who deal with cryptocurrency must keep the records shown in the table below. to meet their crypto tax obligations.
It is critical to maintaining thorough records for individuals using cryptocurrencies for personal and investment or commercial purposes. This is due to the fact that they will be responsible for demonstrating the purpose behind each transaction.
What do the crypto tax obligations mean to you?
The crypto tax obligations are significant. If you are found to be trading in cryptocurrency and making a profit, the ATO will want their cut. The best way to stay on the ATO’s good side is to maintain records of all your trades and report any profits in your tax return.
The ATO knows you are trading in crypto, and if you are making a profit, they want their cut. The best way to stay on the ATO’s good side is to maintain records of all your trades and report any profits in your tax return.
Remember, the onus is on you to prove that your gains are not taxable, so it is always better to err on the side of caution and include them.
The ATO can apply heavy fines and even jail time if you don’t meet your crypto tax obligations.
So, make sure you stay on the right side of the law and declare any profits from your cryptocurrency trading!
Contact us as Ingrams Accounting here if you need any help with your crypto tax obligations.
This information is general and prepared without considering your objectives, personal or business circumstances, financial situation, or needs. Because of this, you should, before acting on this information, consider in consultation with your adviser its appropriateness, having regard to your objectives, personal or business circumstances, financial situation and needs.
Chris lives and breathes numbers and has been finding the fun in accounting for quite some time. The more complex the tax issue, the more you need Chris.
If you want to tax-it-easy, drop him a line!
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