Tax Return:: Tax Treatment for Cryptocurrencies

Hello, this is your tax and super specialist, P&C Tax Professionals.

With the trading and use of cryptocurrency rapidly evolving, income tax implications relating to cryptocurrency transactions have been garnering an immense amount of attention these days. If you have been acquiring or disposing cryptocurrency throughout the year, there are certain tax consequences you should be informed about.

<Cryptocurrency transactions>

As you probably already know from our previous blog post, a capital gains tax (CGT) event arises whenever you dispose/sell your CGT asset (such as your cryptocurrency). According to the ATO, a disposal can occur during the following events:

> when you sell or gift cryptocurrency

> when you trade or exchange cryptocurrency (e.g., if you dispose one of your crypto for another crypto)

> when you convert cryptocurrency to fiat currency (e.g., Australian dollars) OR

> when you use cryptocurrency to receive goods and services.

Despite the fact that your digital wallet may contain a variety of cryptocurrencies, each individual cryptocurrency is regarded as a separate CGT asset.

Exchanging cryptocurrencies

If you happen to have sold one of your cryptocurrencies in order to acquire another cryptocurrency, here you would basically be disposing one CGT asset while acquiring the other CGT asset. Since you have received property rather than money in exchange for the cryptocurrency you were holding, the market value of the cryptocurrency you received would need to be taken into account in Australian dollars (AUD).

If for whatever reason it is difficult for you to value the cryptocurrency you received, the capital proceeds as a result of the disposal would have to be worked out using the market value of the crypto you sold at the time of sale.

Example:

On 20th March 2022, Peter acquired 200 Coin A for $5,000. On 25th of April 2022, via a digital currency exchange, Peter exchanged 50 Coin A for 100 Coin B.

Using the exchange rates listed on the digital currency exchange at the time of transaction, the market value of 100 Coin B was $2,000. For the purposes of working out Peter’s capital gain for his disposal of Coin A, his capital proceeds would amount to $2,000.

Cryptocurrency as an investment

If you purchase cryptocurrency for investment purposes, you might have to pay taxes on any capital gains you make when you dispose your cryptocurrency. Generally, if the capital proceeds from the sale of the cryptocurrency exceed the cost base, you will make a capital gain and vice versa for the opposite scenario.

The personal use asset exemption is not available if you are holding cryptocurrencies as an investment. However, if you keep your cryptocurrencies as an investment for at least a year, you may still be eligible for the CGT discount, which reduces the capital gain you make by 50% upon the disposal of the cryptocurrency you were holding.

Example:

Dominic has been a long-term investor in shares and his balanced portfolio consists of both high and low risk investments. He makes adjustments to his portfolio on a frequent basis according to the advice given by his financial advisor.

Dominic’s advisor recently advised him to invest in cryptocurrency. Dominic followed through with the suggestion and bought a variety of cryptocurrencies, which he now owns in his portfolio. Dominic isn’t familiar with cryptocurrency, but he does periodically change his portfolio in accordance with acceptable investment weightings as he does with all of his other investments.

Since Dominic acquired and held his cryptocurrency as an investment, the proceeds from the disposal of his crypto would be subject to CGT.

Cryptocurrency as a personal use asset

Certain capital gains or losses from the sale of a cryptocurrency that is used for personal purposes may be disregarded.

If the cryptocurrency is stored or used primarily to purchase products for personal use or consumption, it is considered a personal use asset.

Cryptocurrency is not a personal use asset if it is maintained or utilised mainly:

> as an investment

> in a profit-making scheme, or

> in the course of conducting business

The cryptocurrency is more likely to be a personal use asset if it is acquired and used in a short amount of time in order to acquire products for personal use or consumption.

Conversely, it is less likely that the cryptocurrency is a personal use asset if it is purchased and held for some time before any such transactions are made, or if only a small fraction of the cryptocurrency purchased is utilised to initiate such transactions. In such cases, the cryptocurrency is more likely to be used for other purposes such as for investment.

For CGT purposes, only capital gains from personal use assets purchased for less than $10,000 are disregarded. Moreover, all capital losses made on personal use assets are also disregarded.

Example 1:

Eliza wants to attend a musical show. The musical show provider offers tickets at a discounted price for payments made in cryptocurrency. Eliza pays $150 to acquire the relevant cryptocurrency and uses that cryptocurrency to pay for the tickets to the show. Under the circumstances in which Eliza purchased and used the cryptocurrency, the cryptocurrency is a personal use asset in this case.

Example 2:

Arthur has been regularly holding cryptocurrency for over six months with a plan to sell it at a favourable exchange rate. Throughout this time, he has bought a couple of goods and services directly with his cryptocurrency. Since Arthur is using his cryptocurrency as a form of investment, the cryptocurrency cannot be deemed a personal use asset and consequently, CGT will apply to any capital gains he has made.

Staking rewards and airdrops

Token holders who receive a reward for participating in ‘proxy staking’ or voting their tokens in delegated consensus methods earn regular income equivalent to the money value of the tokens/cryptos they receive.

To increase the supply of tokens, some projects ‘airdrop’ newly generated tokens to the existing token holders (e.g., Pundi X and Tron). The monetary worth of an established token received via an airdrop is also included as part of the recipient’s ordinary income at the time of receipt.

<Record-keeping for cryptocurrency>

Whether you’re using cryptocurrencies as an investment, for business or simply for personal use, it is critical to keep detailed records of all of your transactions.

In respect to your cryptocurrency transactions, you must keep and maintain the following records:

> the date of the transactions

> the quantity of crypto(s) purchased/sold

> the unit price of the crypto (both buy and sell)

> the purchase/sale amount of the crypto(s)

> any fees taken by the digital currency exchange platform(s) for the transactions

> the value of the cryptocurrency in Australian dollars (AUD) at the time of the transaction (this can be retrieved from a reputable online exchange site)

> what the transaction was for and who the other party was (even if it’s simply their cryptocurrency address)

> software costs in relation to managing your tax affairs if you have used such a program to calculate your capital gains/losses.

This brings our blog post on tax treatment for cryptocurrencies to an end but if you have any questions or concerns regarding your tax return or super, please do not hesitate to contact us through our official Facebook Page (P&C Tax Professionals – Australia) or reach out to us by sending an email to pnctax@naver.com.

Thank you and bye for now!