In most cases, the word ‘cryptocurrency’ is used when describing digital assets in which various methods of encryption are used to regulate the generation of additional units and then verify these transactions on what’s known as the blockchain. Cryptocurrency also operates completely independently of a central authority, bank or government.
There are various income tax implications associated with Bitcoin and all other cryptocurrencies, and these will vary depending on your particular circumstances. Everyone who is involved in purchasing or selling all forms of cryptocurrency will be required to keep records relating to their transactions.
Bitcoin and other cryptocurrencies are considered as actual property and it is therefore an asset for capital gains tax (CGT) purposes. The information here focuses on the tax-related consequences for taxpayers who are using cryptocurrency to perform transactions.
Performing Transactions by Using Cryptocurrency
A CGT event will occur each time you use any cryptocurrency, such as when it is traded, sold, exchanged, converted into flat currency such as Australian Dollars or used to obtain services or goods of any sort. If you happen to make any capital gain when disposing of cryptocurrency, it is important to keep in mind that some or all of the gain may have taxes applied to it. In some cases, certain capital losses or gains that occur from disposing cryptocurrency that is a personal use asset may be disregarded.
In cases where the disposal is part of a business that you are operating, any profits you make on disposal of it will be assessable as regular income and not as an actual capital gain.
When Cryptocurrency is an Investment
In the event that you obtain cryptocurrency as a form of investment, you may be subject to paying tax on any amount of capital gain you make upon disposal of the cryptocurrency. You will be making a capital gain if the capital proceeds from the sale of your cryptocurrency are more than what you initially paid for it.
If you acquire your cryptocurrency in the form of an investment, you will not be able to take advantage of the personal use asset exemption. However, if you have been in possession of the cryptocurrency for 12 months or longer, you may be able to take advantage of the capital gains tax (CGT) discount that you would be entitled to.
If the capital proceeds from the sale or disposal of your cryptocurrency is less than what its cost base was, you will end up making a capital loss. This capital loss can then be used to reduce any capital gains that have been made in the same year or one year later. However, net capital losses may not be used to offset against any other form of income.
Required Record Keeping
You will be required to keep the following records relating to cryptocurrency transactions you perform:
• Dates that transactions were processed
• Value of the cryptocurrency in Australian Dollars at the time the transaction was processed (this can be obtained from a reputable online exchange)
• Reason for the transaction and who the other party involved was (it is acceptable to provide their cryptocurrency address in this regard)
If you are dealing with any cryptocurrency transactions, it is recommended that you obtain tax advice from a registered tax practitioner.