Tax Implications of Cryptocurrencies
With cryptocurrencies gaining notoriety, many people are unclear on how or when they can be taxed. Despite widespread belief to the contrary, you do pay tax on gains made as a result of using cryptocurrency. If you’ve made a profit from trading cryptocurrency, for example, you need to declare it at tax time.
Here is some important information on cryptocurrencies and their tax implications.
The definition of cryptocurrency
For tax purposes, the Australian Tax Office (ATO) defines cryptocurrency as “a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain.” This includes Bitcoin, or other digital currencies with characteristics that are similar to Bitcoin.
The ATO says cryptocurrency—including Bitcoin—is not Australian currency and is not foreign currency.
Taxes on cryptocurrency
You pay tax on the gain when you exchange cryptocurrency for another currency, or purchase goods or services with it. If you use cryptocurrency in business or professional activities, you may pay tax on the gain as ordinary income. For example, professional cryptocurrency trading or mining, operating cryptocurrency-related businesses, or operating a business using cryptocurrency transactions all count as income.
If you use cryptocurrency in other ways—such as casually or as a hobby—you may have to pay capital gains taxes.
You are not subject to capital gains until you exchange or otherwise dispose of your cryptocurrency holdings. Typical transactions include:
- Selling cryptocurrency
- Gifting cryptocurrency
- Trading or exchanging cryptocurrency for another cryptocurrency or fiat currency
- Converting cryptocurrency to fiat currency
- Exchanging cryptocurrency to purchase goods or services
A capital gain on any of the above transactions is taxable. If you hold the cryptocurrency for more than a year before exchanging it, you may receive a 50% capital gains tax discount. If you have losses on the cryptocurrency exchange, you can use those to reduce capital gains in that year or future years.
Cryptocurrency obtained or held as an investment may be subject to capital gains taxes. Your reason for purchasing or keeping the cryptocurrency is as important as the reason for exchanging it. Even if you use it for a personal purchase, if you acquired it as an investment you must report it and it may be taxed as a capital gain.
Keeping proper records
No matter your reasons for purchasing, holding or using cryptocurrency, it’s important that you keep proper, detailed records of all cryptocurrency transactions. This means keeping a record of:
- the date of each transaction,
- the value of the cryptocurrency in Australian dollars at the time of the transaction,
- the purpose of the transaction, and
- the other party’s details.
Keep all receipts of any transaction including cryptocurrency and records of all costs associated with the transaction.
If you’ve had any cryptocurrency transactions in the past year, you must keep proper records and report it to ATO. Although many people think there are no tax implications for cryptocurrencies such as Bitcoin, ATO views them as income or investments and they can affect your taxes.