Do you currently hold or are you considering investing in cryptocurrency? While cryptocurrencies have attracted the attention of investors and traders, they have also caught the attention of the Australian Taxation Office (ATO) who are monitoring this area with high level of interest.
The creation, trade and use of cryptocurrency is a rapidly evolving area. The information in this article is our current summary of the tax and legislative implications of common transactions involving cryptocurrencies such as Bitcoin. If you are involved in acquiring or disposing of cryptocurrencies, we advise that you regularly check in with your accountant as the tax consequences and record-keeping requirements are likely to change in response to developments in this area.
The ATO view on cryptocurrency
In the tax guidance released by the ATO, it specifies that cryptocurrencies are viewed as an asset. When cryptocurrency is traded, sold or exchanged it triggers an event. Whether this is a Capital Gains Tax (CGT) event or a revenue event will depend on the circumstances of the transaction.
1. Cryptocurrency used in business
If you are carrying on a cryptocurrency business (as a miner, trader etc) then the trading stock rules apply, rather than CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible. If at the end of an income year the value of your closing stock is more than that of opening stock, the difference is part of your assessable ordinary income.
If you are carrying on a business that is not a cryptocurrency business, but receive cryptocurrencies for goods or services you provide, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income.
2. Cryptocurrency as an investment
If you acquire cryptocurrency as an investment, then the gains on disposal of the cryptocurrency fall under the capital gains regime.
When you dispose of your virtual currencies (either by selling, trading or exchanging) a CGT event is triggered resulting in either a capital gain or a capital loss on the profit.
If you have held the investment for at least 1 year, the CGT discount applies and any gain is discounted by 50% for individuals and trusts or by 33.33% for superannuation funds.
3. Cryptocurrency for personal use
If the cost of your digital currency is less than $10,000, and you are only using it to pay for personal goods or services, it is considered by the ATO to be a personal use asset and is not subject to CGT. The ATO notes though that the longer the period of time that a cryptocurrency is held, the less likely it is that it will be considered a personal use asset.
4. Cryptocurrency as an SMSF investment
The emergence of cryptocurrencies as a mainstream financial investment has seen an increasing number of our clients purchase them as an SMSF investment.
From a regulation perspective, while SMSFs are not prohibited from investing in cryptocurrencies, the investment must:
- be allowed for under the fund’s trust deed
- be in accordance with the fund’s investment strategy
- comply with regulatory requirements concerning investment restrictions
Typically, cryptocurrencies are purchased through an investor who transfers money into a ‘digital wallet’ which can then be used to make the purchase. At this stage, many cryptocurrency exchanges will only allow an account to be set up using the name and address of an individual. However, superannuation legislation requires trustees and members to ensure their fund’s assets are held separately from personal assets. Therefore, for audit purposes, you’ll need to have satisfactory evidence that the investments are managed separately from any personal investments. This may include:
- using the fund’s bank account when purchasing
- passing relevant trustee resolutions
- ensuring any exchange account is in name of the SMSF trustee acting as trustee
- creating a fund-specific email address
- completing statutory declarations
As crypto-assets continue to grow in popularity more exchanges are enabling SMSFs to set up accounts that help alleviate these compliance issues. We suggest looking for a digital currency exchange based in Australia as local operators are more likely to understand the legislative requirements of SMSF investors or even cater specifically to this market.
SMSF trustees also need to ensure they take appropriate action to secure the fund’s property. In relation to cryptocurrencies, this means ensuring private keys are kept securely.
Record keeping for cryptocurrency transactions
Whether you are using cryptocurrency as an investment, for personal use, or in business, it is vital to keep good records for all your transactions. Based on advice issued by the ATO, we suggest the keeping the following:
- the date of the transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for and who the other party was (even if this is simply their cryptocurrency address)
- receipts of purchase or transfer of cryptocurrency
- exchange records
- digital wallet records showing a summary of cryptocurrency remaining on hand either throughout the period or at 30 June each year
Additional advice for SMSFs
Because crypto-assets are so new, SMSF software does not support data feeds from exchanges and does not pull through a feed of values for cryptocurrency investments. Therefore, accounting and administering these assets will likely require a manual process such as a spreadsheet of transactions and values.
Speak to the administrator of the fund and your accountant before commencing trading to understand what information and documents will be needed to maintain the accounts and also what an independent auditor will require in terms of evidence at the end of the financial year.
We further advise that SMSF trustees undertake a review of their trust deed and investment strategy before investing to ensure the investment is allowed under the rules of the fund.
For more information on the tax implications of cryptocurrency transactions or for assistance with your record keeping requirements, please contact our advisors on 07 3831 1055 or [email protected].
DISCLAIMER: The information on this website and the links provided are for general information only and should not be taken as constituting professional advice from Hall Browns Accountants. You should consider seeking the appropriate legal, financial, or taxation advice to check how the website information relates to your unique circumstances.