The ATO has released guidance on the taxation of Bitcoin which is likely to cover most cryptocurrencies. The tax implications of some common scenarios are discussed below.
If you are in business and you are using a cryptocurrency to buy and sell goods and services, then it will be treated similar to a foreign currency. That is, the GST implications on any goods and services purchased or sold will need to be included within the sale or purchase price, and that an ‘exchange rate’ needs to be used to determine any cryptocurrency gains or losses. Any realised gains or losses are included as assessable income.
Individuals who buy less than $10,000 of cryptocurrencies for ‘personal use and enjoyment’ will not have any capital gains tax (CGT) implications – ie purchases from companies accepting cryptocurrency such as Microsoft, Expedia etc.
Individuals, trustees of trusts and companies purchasing cryptocurrencies purely as an investment will be subject to CGT. The ‘general’ CGT discount of 50% will still apply, except for companies, provided the asset (cryptocurrency) has been held for more than 12 months. The main item to consider will be record-keeping. Proof of how much you have paid initially and how much you have received when selling will need to be recorded and stored. In the event of an ATO audit, these records will be important in confirming your transactions.
Self-Managed Super Funds (SMSF) purchasing cryptocurrencies have a more considerations. Trustees of the fund need to ensure that any investment in cryptocurrency is in line with the investment strategy of the fund, the Trust Deed allows for it at the time the investment is made, and it is an appropriate investment. Cryptocurrencies must be purchased from cash within your SMSF and cannot be used as an in-specie contribution or purchased from a member.
For tax purposes, gains and losses in the SMSF are taxed in the same way as other capital assets in the fund. That is, CGT may apply to any gains made on the sale or exchange of the cryptocurrency.
If your fund invests in cryptocurrency, there are a few practical issues. Your SMSF auditor needs to confirm the ownership, existence, and value of the cryptocurrency. Cryptocurrencies purchased and stored in a ‘wallet’ generally will not have any title on it, so proof of ownership can be difficult. In addition, each purchase may be stored in different wallets. You need to be able to trace your transactions to identify trades, the value of the trade, and the time and date they occurred.
The above is a simplified summary of the complex tax rules around cryptocurrencies, however an expert tax adviser will be able to provide personal and expert guidance regarding any queries you may have. Please contact the team at Hoffman Kelly to discuss any queries you may have.