The term cryptocurrency is familiar to many Australians. The hype around cryptocurrency trading, and bitcoin in particular, has caught the attention of many investors and traders with the promise of making some quick money.
As cryptocurrencies are still a relatively new form of investment compared to traditional forms of investment, many investors may be uncertain of the tax implications that apply to cryptocurrencies.
What is a cryptocurrency?
A cryptocurrency is a digital currency or digital token created from code using blockchain technology. The currency does not exist in the physical form. Cryptocurrencies are stored in a digital wallet. Just like regular currencies, you can use cryptocurrency to purchase goods and services from businesses that accept them as payment. Cryptocurrencies are bought or sold on an exchange platform using conventional money.
Examples of popular cryptocurrencies
Risks of investing in cryptocurrencies
Many countries do not consider cryptocurrency as an actual currency. The exchange platforms for cryptocurrencies are not regulated. This exposes investors and traders to higher risk as they are not protected from losing their money if the exchange platform fails.
- Cryptocurrencies are not back by the government or banks
- Crytocurrency values are highly volatile, and as a result, speculative. This means the value of your cryptocurrency can fluctuate drastically over short periods of time. For example, the price of Bitcoin peaking over $19000 USD at the end of 2017, only to crash to a little over $3000 at the end of 2018.
- You can lose your cryptocurrency to theft. Hackers and scammers can empty out your digital wallet.
- There is a lack of clarity on the financial and legal regulation of cryptocurrencies.
- Due to the anonymity offered by cryptocurrency, it has the potential of being an attractive means for money laundering and other illegal activities.
Given the above risks, it is wise to proceed with caution, and treat any cash you may put into crytocurrency as speculation. Many people have lost their life savings by putting their money into cryptocurrencies without understanding the dynamics of the market.
As with any well-planned investment portfolio, consider diversification into different asset classes to spread the investment risk. There are a large number of cryptocurrencies in today’s market. It can become easy to fall for the hype without conducting your own research or truly understanding the technology.
Prior to investing in cryptocurrency, it is paramount to conduct your own research and understand what you are investing in. Understand the risks involved in cryptocurrency and talk to your financial advisor who is experienced in dealing with this form of investment.
Tax implications of investing in cryptocurrencies
The ATO sees cryptocurrencies as an asset. This means that when you acquire and dispose of cryptocurrency, you may be subject to capital gains or losses. You are required to report your gains or losses on your tax return. This is similar to investing in shares or property. Any capital gains made from the disposal of your asset is taxable. Cryptocurrency investors who have held their investment for 12 months or more can claim a 50% discount on the capital gains tax. This means you only pay tax on half of the actual gain.
The ATO considers the following as disposal of your asset:
- Selling or gifting of your cryptocurrency
- Trading or exchanging from one cryptocurrency to another
- Converting your cryptocurrency to a conventional currency
- Using the cryptocurrency to purchase goods and services
For capital losses, you can offset this again a capital gain in the same year or future years. You cannot deduct a net capital loss from your other income.
Trading versus buying and holding
If the ATO classifies you as a trader, your gains will be taxed as income rather than capital gains. This means the 50% discount does not apply to you, and you cannot offset gains against your capital losses. However, you can offset your trading losses against your other types of income.
However, if you acquire cryptocurrency purely to purchase goods and services for personal use, the purchase is exempt from CGT if it costs under $10,000 and provided you can substantiate your claims. Where the cost of the Bitcoin exceeds $10,000, the personal use exemption will not be available and CGT will apply.
Regulations are likely to continue evolving as more investors and traders acquire cryptocurrencies as part of their portfolio.
Guidelines for investing in cryptocurrencies can be confusing. It is essential to disclose your cryptocurrency activities and transactions, or face the possibility of being penalised by the ATO. Contact the team at Moiler to help you with lodging your tax return.
Other articles you may be interested in:
Prepay Your Small Business Expenses and Save Tax
This document has been prepared by Moiler Partners, an Authorised Representative of Count Financial Limited ABN 19 001 974 625; AFSL 227232 (“Count”) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 and is for general information only. The presentation has been prepared without taking into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for your needs and consider talking to a Count Authorised Representative before making any investment decision. The relevant PDS should be considered before making a decision about any financial product. The information is provided as an information service only and does not constitute financial product advice and should not be relied upon as financial product advice. 16 December 2019.