Cryptocurrencies and tax – The new world of trading and investing

Would you believe me if I told you that over 600,000 taxpayers have invested in cryptocurrency recently? The recent rise in the value of cryptocurrencies has put a fast track on many investors plans, jumping in when it is red hot.

With Bitcoin having risen by over 4,000% and Ethereum by over 25,000%. We can see where they are coming from.

This has led to the Australian Tax Office (ATO) becoming concerned regarding the taxation of cryptocurrency gains. To address this concern the ATO launched a data-matching program, now collecting data on cryptocurrency transactions from the 2015 financial year, up to and including the 2023 financial year, hence why it is important to understand the tax implications of investing in cryptocurrency.

What is cryptocurrency?

Cryptocurrency is 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.

How should I be treating profits from cryptocurrencies?

It is important to consider if you are a cryptocurrency investor or a cryptocurrency trader.

Investors purchase cryptocurrency with the intention of holding it for long term gain. Investors will be assessed on capital account and will be able to access the 50% CGT discount if the investment is owned for more than 12 months. Any losses will be treated as a capital loss. Capital losses can only be applied against capital gains.

Traders purchase and sell cryptocurrency regularly over the short term to make profits, and are assessed on revenue account with their profits being treated as business income.

What if I exchange a cryptocurrency for another cryptocurrency?

It is a taxable event if you dispose of one cryptocurrency to acquire another cryptocurrency. The capital proceeds would be the market value in Australian dollars of the cryptocurrency you acquire at the time of transaction.

If the cryptocurrency you received can’t be valued, the capital proceeds are worked out using the market value in Australian dollars of the cryptocurrency you disposed of at the time of the transaction.

Personal use asset

Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption. Cryptocurrency is not a personal use asset if it is kept or used mainly as an investment, in a profit-making scheme or in the course of carrying on a business. In addition, the longer the cryptocurrency is held the less likely it is that it will be a personal use asset. It is worked out at the time of disposal if it is a personal use asset.

Capital gains made from personal use assets that are less than $10,000 are disregarded. All capital losses that are made from personal use assets are disregarded.

What do I need to do?

Cryptocurrency popularity continues to rise which means it will remain a focus area for the ATO. It is important to keep detailed records and to understand the tax outcomes of all cryptocurrency transactions. Please contact PKF if you require further assistance or additional information.