Bitcoin Buyers Beware the Tax Trap

Bitcoin buyers beware the tax trap

Cryptocurrencies like Bitcoin and Ethereum have generated a lot of interest over the past few years, particularly due to the spectacular rise and fall of their market value.  From being worth just $1 back in 2011, the value of one Bitcoin today might be as high as $70,000, but that is no guarantee of its value next week!

While the big gains sound like great news for an investor, the flipside to consider is that the ATO will take a slice of that profit at some point.

How are cryptocurrencies taxed?

The Australian Taxation Office (ATO) generally looks at cryptocurrencies as an asset that is subject to Capital Gains Tax (CGT).  Therefore, anytime you buy or sell cryptocurrency, or exchange one type of cryptocurrency for another, that is a CGT event and may result in CGT being payable.

If you regularly buy and sell cryptocurrencies, then you may instead be classified as someone who is in the business of trading cryptocurrency, in which case the cryptocurrency is treated like trading stock and any income and loss is ordinary income, rather than a capital gain/loss.

Cryptocurrency as an investment

If you have bought a cryptocurrency as a long-term investment, then this will fall under the capital gains tax category.  This means that, as the price of the currency rises or falls, you do not pay any tax.  When you ultimately sell the cryptocurrency, or exchange it for any other cryptocurrency, that will trigger capital gains tax. 

While a digital wallet can carry many different types of cryptocurrency, each of these currencies will be a separate CGT asset.

If you have held your cryptocurrency for longer than 12 months, you may be entitled to the CGT discount, which will reduce the CGT payable.  If you make a capital loss on disposal, you can carry this forward and offset it against future capital gains.

What if it is a personal use asset?

You may have bought your cryptocurrency purely or mainly to purchase an item for your personal use or consumption.  If that is the case, the ATO would look at this cryptocurrency as a "personal use asset", which may be ignored for CGT purposes.

There are specific requirements for this exemption to apply, so it is worth checking with your accountant before assuming that no tax will be payable on your cryptocurrency disposal.

What happens if my cryptocurrency is stolen or lost?

It is worth remembering that theft and loss can still occur with cryptocurrency.  In certain circumstances, you may be able to claim a capital loss for this loss.  To claim a capital loss, you would need as much evidence as possible around the purchase of the cryptocurrency and the circumstances around the loss/theft.

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