Unless you have been locked away on a desert island for the last few years, chances are you’ve heard of cryptocurrencies. Cryptocurrencies are digital currencies operating independently from central banks or governments. Using encryption techniques to generate and regulate production, these currencies were developed to reduce fraud and increase security, the success of which is a hotly debated topic.
While Bitcoin is the most popular, there are more being created nearly every day – there’s Ethereum, Dash and Zcash just to name a few. Now the ATO is actively tracking these schemes via your banking transactions to and from online wallets and you know that they want a piece of the action!
What are the ATO rules on Cryptocurrency?
When it comes to cryptocurrencies, ATO guidelines state that it is an asset, rather than an actual currency. This is due to the volatile nature of these assets and how they can change in value so rapidly.
Due to this economy, the way to declare these cryptocurrencies to the ATO may not be so straightforward.
When you declare the AUD value of your coins at the end of the financial year, you must declare the value they were at the time they were received. So if you were to receive Bitcoin to the value of $250,000 in January, their value could drop to $20,000 by the end of the financial year. When you are declaring this income, you must declare at $250,000.
If value does decrease, it means you’ll be paying taxes on money that you no longer have. It seems unfair, and in many ways it is. But the ATO is simply trying their best to navigate this new form of currency.
Cryptocurrency & Capital Gains Tax
When you sell, trade, exchange from one cryptocurrency to another or use your cryptocurrency to obtain goods or services a CGT event occurs.
If you are turning a profit from the disposal of your cryptocurrency, your gain may be taxed, just as if you were to sell a property or other valuable asset for a higher value than it was purchased.
So, if you purchase $1,000 of a cryptocurrency, and sell 3 years later for $10,000 your gross capital gain can be eligible for the CGT discount. However, if you’re buying and selling cryptocurrencies regularly for a profit, the ATO will treat you as a trader, and you won’t be eligible for the CGT discount.
Accepting Cryptocurrency as Payment
If you’re a business who accepts a cryptocurrency instead of AUD, the ATO sees this as being paid with goods or services. The AUD value of cryptocurrencies is the taxable amount of the non-cash consideration for your goods or services at the time of the transaction.
However if you use cryptocurrencies to pay for goods and services, the AUD value of the payment would be used for tax purposes as if you had paid with cash.
4 Top Cryptocurrency Tax Tips
In short, these are the top things you need to remember before you dive into crypto.
- You must pay tax on the value of the cryptocurrency when it was received.
- Unless you sell immediately upon receipt of the funds you can end up with an asset worth less than the tax you’ll have to pay.
- The receipt of the asset in exchange for your work is standard ordinary income. As if a client was to buy you a car, rather than paying an invoice, the value of the car is taxable as if it was paid via standard invoices so no incentive for a contra system where the ATO doesn’t get their cut.
- The capital loss or decline in value of the asset after you have received it is quarantined against future capital gains so it is not usable to offset ordinary income.
This is a standard part of our tax system and is unlikely to change so proactive tax planning and proactive advice driven accountants (as opposed to compliance driven) are more important than ever.
Ultimately, when you’re dealing with something that’s grown globally and so quickly, without a governing body to liaise with tax offices and central banks, there will often be grey areas and confusion.
Just as the public is trying to work out the best ways to use cryptocurrencies, the ATO is also trying to ensure this asset is fair for all parties involved.