As more investors get into Bitcoin and other cryptocurrencies, the ATO and the public are keen to understand digital assets. Tax is often an afterthought for new investors. With Bitcoin values and popularity on the rise, people jump in wanting make money now and worry about the tax later. However, keeping good records from the beginning can save you from paying more tax than necessary.
Bitcoin has the largest market capitalisation, however there are currently over 1200 different cryptocurrencies. We don't yet know the tax treatment of every crypto or digital currency out there but most would have similar characteristics to Bitcoin. So let's begin by understanding Bitcoin.
Most importantly, to begin with, in summary:
- The continued rising value of Bitcoin means that gains from Bitcoin transactions are under the ATO spotlight. Never assume that your profits won't be taxable or subject to Capital Gains Tax if you don't disclose them in a tax return. If the ATO find that a taxpayer is living beyond their reported means, they can issue amended or default assessments.
- If you invested very recently and sustained losses when values fell, your losses may be deductible if you had intended to make a profit when you acquired the Bitcoin.
- You need to keep clear records of all transactions, activities and the intentions behind them. Especially if you purchase Bitcoin for both speculative gain and personal use.
What is Bitcoin?
- It's one of many cryptocurrencies, also known as Altcoins.
- On a Bitcoin blockchain, a network verifies transactions between users (peer-to-peer) which, once verified, become permanent transactions.
- A community of host computers (nodes) represent this network which is running the Bitcoin software. Each node uses computer processing power so network members can continuously update and verify transactions on a ledger. That way the blockchain is kept up to date and unalterable.
- This process of verifying transactions is called mining, and the members of the network are often rewarded with new Bitcoin. Other blockchain-based cryptocurrencies offer different rewards.
- There is no need for a central authority or government regulator because the Bitcoin blockchain maintains a record of ownership.
Do you pay tax on Bitcoin gains?
The ATO holds the view that Bitcoin and similar cryptocurrencies are assets for Capital Gains Tax (CGT) purposes. They have issued some online guidance here.
The ATO has made it clear that it does not view Bitcoin as money or a foreign currency.
Investment and personal transactions:
This is what we understand so far....
- If you purchase Bitcoin as an investment and are not buying and selling in a business-like way or as a profit-making scheme, then the gains you make from selling could be assessed as capital gains rather than as ordinary income.
- Investment assets usually provide a periodic return (such as rent from real property and dividends from shares) so the ATO may be more inclined to consider that Bitcoin was purchased with a profit-making purpose in many cases.
- If the Bitcoin was held as an investment by certain individuals or trusts for more than 12 months, a 50% CGT discount can reduce the taxable amount.
- If Altcoins are purchased with Bitcoin, rather than cash, the 50% CGT discount may only apply if the Bitcoin that was used was held for more than 12 months. Bitcoin may be purchased and disposed of in short periods of time to acquire Altcoins, so the gains or losses could be minor anyhow depending on market movements.
- Converting Bitcoin to Altcoins results in gains or losses that could be subject to tax treatment which is similar to how foreign currency gains/losses are assessed, whether the CGT rules or other income tax rules apply.
- If your Bitcoin was purchased with the intention to pay for personal items or services with it (e.g. food, retail goods, holiday accommodation etc) then the profits from resale would be subject to CGT-rules, and the 50% discount could apply. However, 'personal use assets' that cost less than $10,000 are exempt from CGT.
- Every time you purchase goods or services for personal use with Bitcoin or Altcoin, it's treated as a disposal for tax purposes.
It is a bit confusing but will make more sense at tax time if you maintain records of the intention behind every acquisition of Bitcoin now. So keep taking notes as you go along. That will make it easier to ascertain the correct tax approach later.
Trading and speculating:
Traders and speculators buy Bitcoin with a profit-making purpose and any profits are taxed as ordinary income (i.e. revenue account, not capital), unless the activity is a hobby. If the income is assessable, the expenses of purchasing Bitcoin are deductible so that you're ultimately taxed on your 'Net Profit'.
Bitcoin doesn't provide the owner with a periodic return as other investment assets, such as rental properties and shares, do. For this reason, the ATO may consider that a profit-making purpose is behind most purchases of Bitcoin even if the Bitcoin is held for a long period of time. However, as more businesses accept Bitcoin as payment this view may change over time.
Using Bitcoin in business:
Just as with barter transactions, an Australian dollar value has to apply when a business receives Bitcoin as payment for its goods or services. The Australian dollar value is included in the business's income. The business can also claim a deduction for the goods and services it purchases with Bitcoin. Australian dollar values can be provided by a reputable Bitcoin exchange.
The GST treatment of cryptocurrencies has been updated, and as a result some digital currencies are now being treated like fiat money.
If you're in the business of buying and selling Bitcoin as an exchange service, the Bitcoin you hold will be regarded as trading stock. The proceeds of selling are included in income and a deduction is claimed for the associated purchases. Any Bitcoin held at the end of the tax year will be brought to account as the closing value of your trading stock.
Such taxpayers will be considered to be carrying on a business of Bitcoin mining. The Australian dollar value of the Bitcoin rewards will be included in income, along with any gains from selling mined Bitcoin. Deductions should be claimed for expenses incurred in the mining activity, just as business expenses are normally claimed.
Doing tax returns and keeping the right records:
Here's a summary which may help you be better prepared for tax-time:
- All Australian resident taxpayers are legally obliged to report their worldwide income in a tax return, and must maintain appropriate records to support their disclosures.
- The ATO are pretty good at data-matching these days, however the decentralised and hidden nature of cryptocurrencies makes it harder for them to trace taxpayers' transactions and trades. However, they can still audit taxpayers if their means are noticeably greater than the income reported in their tax returns, or if their banking activity substantially decreases.
- The ATO may ask: "How did you pay for that nice new car and how are you paying your bills these days, Mr Jones?". If the ATO believes a taxpayer hasn't reported all of their income, and the taxpayer doesn't cooperate or adequately explain themselves, the ATO can estimate the income on what they consider to be "reasonable grounds". They can then issue a default tax assessment with severe penalties added. (Tip - get a good accountant to work it before the ATO do, it'll cost you much less!).
- Investors and speculators who make losses need to work out whether their losses are on revenue account of whether to report a capital loss on an investment (unless they disposed of a personal use asset under $10,000).
- If a taxpayer receives an amended or default assessment from the ATO then the onus is on the taxpayer to object to the assessment with proof that the ATO's assessment is excessive.
Your accountant most likely won't be able to give you any clear cut answers about the tax you will or won't owe, until they have had the opportunity to examine all of your annual records closely and think about it. That's probably not going to happen until after the end of the tax year.
So, in the meantime, to avoid a shock at tax-time, we suggest that you honestly consider how much profit you've made. How much better off are you, if your gains are converted to Australian dollars? Then look at the tax rates here, consider what income tax bracket you'll be in with the Bitcoin profit added to your other income from salary and other sources, and set aside a percentage of your Bitcoin gains for estimated tax.
It's really important to keep records of all trades and transaction activity, so download your transaction histories from exchanges and wallets on a regular basis.
If you're using Bitcoin for both personal and speculative purposes, keep clear records of the original purchases as being for one purpose or the other. The taxpayer must be able to show the intention behind each purchase and transaction. If it's not possible to identify the tax-free or concessionally taxed disposals from your records, then you may pay more tax than necessary.
Some of the above materials is from this