In this edition of ‘It depends’, partner Fletch Heinemann talks about the tax treatment of cryptocurrencies.
Welcome to it depends. Today we’re talking about the tax treatment of cryptocurrencies.
What is the tax treatment of cryptocurrencies?
Well, it depends. The tax treatment of cryptocurrency depends on the reason that the person acquired the particular currency in the first place. So, it’s not really a question of determining a tax treatment by a particular category. We need to know whether particular coins, for example, were acquired with the intention to be held for a long term investment, whether they were intended to be sold for a profit, whether they were to be used for mining or staking, or any other sort of variations of activity in which to generate income from those coins. So, it’s not a case of a one size fits all in terms of the tax treatment of cryptocurrency. We need to understand the specific intention when the coins were acquired and then also what they’re being put to use for.
Is cryptocurrency a CGT asset?
Yes, a cryptocurrency is a CGT asset but that doesn’t mean that necessarily any disposal of the cryptocurrency will be on capital account. The ATO view is that a particular coin is a CGT asset. A wallet will also be a CGT asset, as well as the private key. So, any dealings in any one of those things can be CGT events and can trigger capital gains. This is really important because there’s some misunderstanding that if particular coins were exchanged for other coins, then that wouldn’t trigger capital gains. That’s not correct. So, the issue isn’t whether the cryptocurrency is converted back to fiat currency. The issue is whether there’s a disposal or some other CGT event in relation to a particular cryptocurrency.
So how do you figure out the tax treatment?
Well, to figure out the tax treatment, the starting position is we need to understand the actual facts. So, that will include the taxpayer’s intention when they acquired the particular CGT asset, so commonly the coins, and it will also include other facts in terms of what the taxpayer is using the particular coins for and their pattern of trading and other history in relation to other CGT assets, which might include other cryptocurrencies or other assets. Once we’ve established those facts, then the question is whether the particular assets are held on capital account or revenue account. If they’re held on capital account, they might be held for investment purposes or they might be personal use assets. If it’s held on revenue account, then we need to determine then whether any income from it is part of carrying on a business, or whether it’s an isolated, profit making undertaking, or whether it’s income from services or from some other use to which the coins are put.
What is a personal use asset?
Personal use asset is a particular type of CGT asset that’s used for an individual’s personal use or enjoyment. So, in this context, we’re really looking at where people have acquired coins for the purpose of either using it as a hobby or for the purpose of often online shopping. There are different rules for personal use assets, so essentially any capital losses from personal use assets are disregarded and any capital gains from personal use assets are also disregarded. But only if the cost base of that asset is $10,000 or less.
What is the ATO’s approach?
The ATO’s approach at the moment is to educate taxpayers and their advisers that transactions involving cryptocurrency have tax consequences, even when that cryptocurrency isn’t converted back to a fiat currency like Australian dollars. The ATO is getting information from digital currency exchanges in Australia, and the ATO also receives information from AUSTRAC for incoming funds coming into Australia and outgoing funds going from Australia. So, as part of the ATO’s education campaign at the moment, we expect that there will be more review activity and audit activity in relation to transactions involving cryptocurrencies. If you have any questions, please feel free to get in contact.