Investing in Bitcoin? Know the tax implications
A bit confused about Bitcoin? What is it and what does tax have to do with it? Here, we share a few key facts and the tax consequences that may arise if you are thinking about investing (or have already invested) in Bitcoin.
Note: any reference to Bitcoin in this article refers to cryptocurrency, or other crypto or digital currencies that have the same characteristics as Bitcoin.
Cryptocurrency (and Bitcoin) explained
Bitcoin was the first cryptocurrency but now, it is just one of many types of cryptocurrencies. As at 2017, there were around 1,100 different cryptocurrencies in existence. Cryptocurrencies are a type of global digital currency that uses encryption techniques to buy or sell items. Where traditional currencies are regulated by a central bank, Bitcoin is an unregulated currency. Each transaction is registered on a shared public ledger called a ‘blockchain’.
Tip: be aware of tax scammers impersonating the ATO and demanding Bitcoin or other cryptocurrency as a form of payment for fake tax debts. Cryptocurrency operates in a virtual world, and once the scammers receive payment, it is virtually impossible to get it back.
Is Bitcoin money or an asset?
The ATO’s view is that Bitcoin is neither money nor Australian or foreign currency. Rather, it is property and is treated as an asset for capital gains tax (CGT) purposes. Other cryptocurrencies that have the same characteristics as Bitcoin will also be assets for CGT purposes and will be treated similarly for tax purposes.
Capital gains tax implications
CGT ‘events’ are the different types of transactions that may result in a capital gain or capital loss. A CGT event happens when you dispose of your cryptocurrency.
Disposing of your cryptocurrency means:
- selling, trading or exchanging your cryptocurrency;
- converting it to Australian dollars; or
- using it to obtain goods or services.
If you make a capital gain on the disposal of a cryptocurrency, some or all of the gain may be taxed. If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.
What if you acquire Bitcoin as a personal use asset?
Personal use of cryptocurrency is not subject to income tax or GST in Australia. Cryptocurrency may be a personal use asset if it is acquired and kept or used mainly to purchase items for personal use or consumption.
Some capital gains or losses that arise from the disposal of cryptocurrency that is a personal use asset may be disregarded.
- Only capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes.
- All capital losses you make on personal use assets are disregarded.
What if you acquire Bitcoin as an investment?
If you acquire Bitcoin as an investment, it means you have kept or used your cryptocurrency in a profit-making scheme or in the course of carrying on a business.
The tax consequences are:
- you may have to pay tax on any capital gain you make on disposal of the cryptocurrency;
- you will not be entitled to the personal use asset exemption;
- if you held the cryptocurrency for 12 months or more, you may be entitled to the CGT discount.
Tip: You must keep records of:
- the date of transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction
- what the transaction was for and who the other party was.
Claiming deductions if you’re carrying on a business?
Examples of businesses that involve cryptocurrency include:
- cryptocurrency traders
- cryptocurrency mining businesses
- cryptocurrency exchange businesses (including ATMs).
In the context of carrying on a business, funds or property you receive through the acquisition and disposal of cryptocurrency are likely to be ordinary assessable income where you receive money or property in the ordinary course of your business. If these gains or profits are ordinary income, you may be able to claim deductions. Any capital gains you make are reduced to the extent that they are also ordinary income.
Note: proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income.
A reminder to SMSF trustees investing in Bitcoin
While self-managed superannuation funds (SMSFs) are not prohibited from investing in Bitcoin and other cryptocurrencies, trustees are reminded that the investment must:
- be allowed for under the fund’s trust deed
- be in accordance with the fund’s investment strategy
- comply with regulatory requirements concerning investment restrictions. ■