Cryptocurrency, usually shortened to crypto, is used to describe a digital or ‘virtual’ currency. Crypto is similar to normal currency when it comes to spending but it differs in the fact that nobody controls it and there are no physical coins or notes. A typical example is bitcoin It is just the transfer of digital assets.

Cryptocurrency is tracked in a blockchain. Put very simply, a blockchain is a digital journal or “ledger” that records and stores all crypto transactions. That ledger is “decentralised” in that it is not controlled by a bank or government or company. The ledger has multiple digital copies, stored all over the world, and each copy contains the same transaction history.

The fact that blockchain is decentralised and “non-government” does not mean it is a secret.

The ATO has access to this information and will seek to data match the information disclosed in your return with its records.

How is Crypto taxed in Australia?

The ATO released guidance on the tax treatment of bitcoin in December 2014.  Since this time, the ATO has continued to issue further guidance. The current Australian tax treatment in respect of investors is outlined below.

Bitcoin is not a foreign currency

The ATO does not see crypto as money, and they don’t class it as a foreign currency. See Taxation Determination TD 2014/25 for ATO views. The Treasury Laws Amendment (2022 Measures No 4) Bill 2022 will amend the definition of “foreign currency” to confirm that digital currencies are not foreign currency for tax purposes.

Capital Gains Tax

Crypto assets including cryptocurrencies, such as bitcoin, generally fall under the CGT provisions. See Taxation Determination TD 2014/26 for the ATO views on the CGT treatment.

Investments

Where crypto assets are held as an investment, a CGT event can occur for a variety of reasons with the most common being the disposal of crypto assets at the time the asset is sold. A transaction involving a disposal takes place when you do any of the following:

• sell a crypto asset;
• gift a crypto asset;
• trade, exchange or swap a crypto asset for another crypto asset;
• convert a crypto asset to Australian or foreign currency (otherwise known as ‘fiat currency’); and
• buy goods or services with a crypto asset.

If a capital gain is made on the disposal of crypto assets, some or all of the gain may be taxed.

You will need to keep a record of each and every transaction including: 

• receipts when you buy, transfer, or dispose of crypto assets;
• a record of the date of each transaction;
• a record of what the transaction is for and who the other party is (this can just be their crypto asset address);
• exchange records;
• a record of the value of the crypto asset in Australian dollarsat the time of each transaction;
• records of agent, accountant, and legal costs;
• digital wallet records and keys; and
• a record of software costs that relate to managing your tax affairs.

You need to keep details for each crypto asset as they are separate CGT assets.

Your accountant will need to do a separate CGT calculation in respect of each and every transaction. This can lead to additional costs in preparing your income tax return.

Alternatively, you should download a crypto tax report from your provider (e.g. Koinly or Crypto Tax Calculator) This report shows your profit/loss and capital gains for the financial year. Your accountant can use this to work out your tax liability on your crypto investments.

Each transaction will give rise to a capital gain or capital loss.

Capital losses can only be offset against capital gains and cannot be offset against any other assessable income (i.e. salary, interest, dividends etc). Any capital losses not utilised in the current year can be carried forward to a later tax year and offset against future capital gains.

Personal use assets

Certain capital gains or capital losses from disposing of crypto assets are treated as personal use assets for tax purposes. The most common situation of personal use of crypto assets is to buy items for personal use or consumption.

The value of a personal use asset must be less than AUD 10,000.

Trading stock

Crypto assets held by entities carrying on a business of mining and trading crypto assets or carrying on a crypto asset exchange business will generally be treated as trading stock for tax purposes.

Further, crypto assets received as a form of payment in the ordinary course of business will also be treated as trading stock where the crypto asset is held for the purpose of sale or exchange. As such, proceeds from the sale of crypto assets held as trading stock in a business are considered ordinary income for the entity (rather than taxed under CGT rules).

See Taxation Determination TD 2014/27 for ATO views on cryptocurrencies as trading stock.

It may be problematic for an individual investor to try to claim that their crypto assets should be treated as trading stock, particularly when there are losses involved. You would need to demonstrate that you are carrying on a business. Realistically, you can expect the ATO to dispute this position.

 Any proposed changes on the horizon? 

On 21 March 2022, the former Government released the Terms of Reference for a review to be undertaken by the Board of Taxation (the Board) into the appropriate policy framework for the taxation of digital assets and transactions in Australia.

 The Board has been asked to:

• Consider the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
• Consider the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
• Consider the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
• Analyse the taxation of digital assets and transactions in comparative jurisdictions and consider how international experience may inform the taxation of digital assets and transactions in Australia; and
• Consider whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.

The Board had been asked to report back to the Government by 31 December 2022.

We await the publication of the Board’s recommendations and the Government’s response. However, we would be surprised if there is a change from the current CGT treatment for cryptocurrencies for investors.

What should I do now?

You should speak to your accountant to better understand how the CGT treatment and record-keeping requirements in respect of cryptocurrencies and how this affects your specific situation.

Please don’t hesitate to contact us if you’d like more information about the Australian tax treatment of cryptocurrencies and the associated tax compliance requirements.