Have you dived into the world of cryptocurrency exchanges? With the crypto transactions on the ATO radar, it’s important to understand the tax consequences of your cryptocurrency transactions.
Cryptocurrency is an encrypted virtual currency, which exists as digital tokens. Cryptocurrency operates independently of a central bank, central authority or government.
This digital currency operates via decentralised ledgers or digital wallets, but can be exchanged for online goods and services.
The ATO treats cryptocurrency as a type of barter exchange. There is no problem with exchanging goods and services, as long as the transactions are recorded and valued correctly.
The ATO has set out guidelines on the tax treatment of cryptocurrencies. While the ATO’s guidance has remained consistent for some time, it is still a developing space, and rules and legislation may change.
How Does the Taxation Work on Cryptocurrencies?
The profits and losses made from cryptocurrency transactions get taxed. How you’re taxed depends on your intention and setup.
An investor buys and sells cryptocurrency as an investment, with the goal of gradually building wealth over an extended period.
Profits and losses that fall into this category will be subject to Capital Gains Tax.
Crypto Taders or Businesses
A trader is active in crypto with an intention of making a profit and the transaction is part of a business operation or has commercial characteristics.
- Commercial cryptocurrency forging or mining;
- Regularly buying and selling for short-term gains;
- Operating a cryptocurrency-related business (e.g. a crypto exchange).
Whether you are carrying on a business and when the business begins are important information.
The ATO will consider whether you carried the activities out in a business-like manner, whether there was an expectation of commercial viability or a business plan, and other factors.
The ATO will tax profits or losses from crypto business activities as ordinary income.
Using Cryptocurrency for Business Transactions
If you use cryptocurrency in your business activities, you need to account for it as you would for other business transactions.
If you receive cryptocurrency for goods or services you provide, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income. Therefore, this is the same process as receiving any other non-cash consideration under a barter transaction.
One way of determining the value in Australian dollars is to use the fair market value from a reputable cryptocurrency exchange.
If you purchase business items using cryptocurrency (including trading stock), you can claim a deduction based on the market value of the item.
When Does Capital Gains Tax Apply on Cryptocurrency Transactions?
A CGT event occurs when you dispose of your crypto.
For example, when you:
- Sell or gift cryptocurrency;
- Exchange cryptocurrency for fiat currency (e.g. Australian dollars);
- Exchange cryptocurrency for another cryptocurrency (e.g. Bitcoin to Dogecoin);
- Use cryptocurrency to buy goods or services (if not seen as a personal use asset).
What Cryptocurrency Transaction Records to Keep for Tax Time?
Whether you are a trader or an investor, you need to keep detailed records of your cryptocurrency transactions. These include:
- The date of each transaction;
- The value in Australian dollars at the time of the transaction (you can get this from a reputable crypto exchange);
- What the transaction was for;
- The details of the other party involved (even if it’s just their crypo wallet address).
Generally, records you should keep include:
- Receipts of cryptocurrency purchases or transfers;
- Exchange records;
- Records of agent, accountant and legal costs;
- Digital wallet records and keys;
- Software costs associated with the management of your cryptocurrency investment (e.g. if you use Koinly or other crypto tax software).
Talk to us about getting your crypto transaction records together for your tax return. We’ll check and help you record your crypto transactions correctly., so you don’t get caught out by the ATO spotlight on cryptocurrency at tax time!