Cryptocurrency is gaining popularity, and many people are unclear how or when they will be taxed. Despite widespread belief to the contrary, you are taxed on gains made due to obtaining or using cryptocurrency. If you’ve made a profit from trading in cryptocurrency, you need to declare this gain at tax time.
Here is some helpful information on cryptocurrencies and their implications for tax time.
How cryptocurrency is defined
For taxation 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.” Which can include Bitcoin or other forms of digital currencies with characteristics that are similar to Bitcoin.
The ATO says cryptocurrency—including Bitcoin—is not classed as Australian currency and is not foreign currency.
How cryptocurrency is taxed
You can be taxed on the profits when you exchange cryptocurrency for another currency, other cryptocurrencies, or purchase goods or services. If they are used in professional or business activities, they can be taxed as income. For example, professional cryptocurrency mining or trading, operating a business using cryptocurrency or operating cryptocurrency-related businesses counts as income.
If the cryptocurrency is used in other ways—such as a hobby or casually—it can be taxed as an investment and is subject to capital gains taxes.
You become subject to capital gains taxes when you dispose of or exchange your cryptocurrency holdings. Typical transactions may include:
- Gifting cryptocurrency
- Selling Cryptocurrency
- Exchanging or trading cryptocurrency for another cryptocurrency or fiat currency
- Converting your cryptocurrency to fiat currency
- Trading cryptocurrency to purchase goods or services
Capital gains on any of the above transactions will be taxed on part or all of the income. If you hold the cryptocurrency for more than 12 months before exchanging, trading, or selling it, you may receive a capital gains tax discount of 50%. If you have had losses on the cryptocurrency exchange, you may use those to reduce capital gains that year or in future years.
Cryptocurrency obtained or held as an investment can be subject to capital gains taxes. Your reason for purchasing or keeping the cryptocurrency can be as important as the reason for exchanging it. Even if it is used for personal purchase, you must report it as an investment if you acquired it, and it can be taxed as a capital gain.
Keeping proper records
No matter your reasons for purchasing, using, or holding cryptocurrency, it’s essential that you have detailed records of all your cryptocurrency transactions. This includes keeping a record of the date of each transaction, the purpose of the transaction, the value of the cryptocurrency in Australian dollars at the time of the transaction, and the other party’s details.
Keep all receipts of all transactions involving cryptocurrency and records of any costs associated with the transaction.
If you’ve made any cryptocurrency transactions in the past 12 months, you must keep proper records and report the transaction to the ATO. Although many people think they don’t have to pay taxes on cryptocurrencies such as Bitcoin, ATO views them as investments or income, and they can affect your taxes. If you have any questions about the tax implications of cryptocurrency get in touch with us today and Join the Conversation…