Cryptocurrencies – Tax treatment

Overview

The term cryptocurrencies is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain.

Cryptocurrency generally operates independently of a central bank, central authority or government.

The creation, trade and use of cryptocurrency is rapidly evolving. This information is our current view of the income tax implications of common transactions involving cryptocurrency. Any reference to ‘cryptocurrency’ in this guidance refers to Bitcoin, or other crypto or digital currencies that have the same characteristics as Bitcoin.

If you are involved in acquiring or disposing of cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances.

Everybody involved in acquiring or disposing of cryptocurrency needs to keep records in relation to their cryptocurrency transactions.

If you have dealt with a foreign exchange and/or cryptocurrency there may also be taxation consequences for your transactions in the foreign country.

Transacting with cryptocurrencies

A CGT event occurs when you dispose of your cryptocurrency. A disposal can occur when you:

• sell or gift cryptocurrency
• trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
• convert cryptocurrency to fiat currency like Australian dollars, or
• use cryptocurrency to obtain goods or services.

If you make a capital gain on the disposal of a cryptocurrency, some or all of the gain may be taxed.

Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded.

If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.

While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.

Personal use asset

Cryptocurrency is only capable of being acquired, held and transacted with. The period of holding and the nature of the transaction is relevant to whether your cryptocurrency is a personal use asset.

The relevant time for determining whether or not it is a personal use asset is at the time of its disposal.

During a period of ownership, the way that cryptocurrency is kept or used may change.  For example, cryptocurrency may originally be acquired for personal use but ultimately be kept as an investment.

The longer the period of time that a cryptocurrency is held, the less likely it is that it will be a personal use asset.

Cryptocurrencies are not a personal use asset if it is acquired, kept or used:

• as an investment
• in a profit-making scheme, or
• in the course of carrying on a business.

If you have to exchange cryptocurrencies you own to Australian dollars (or to a different cryptocurrency) to purchase or acquire the items for personal use or consumption, then this strongly indicates the cryptocurrency you own was acquired, held and used for a purpose other than personal use or enjoyment.

Some capital gains or losses that arise from the disposal of cryptocurrencies that are a personal use asset may be disregarded.

Cryptocurrency may be a personal use asset if it is used mainly to purchase items for personal use.

Only capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded.

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Source: Australian Taxation Office