As we run through the swing of tax season, there is a definite increase in the number of taxpayers investing or holding cryptocurrency. The tax treatment of cryptocurrency has been clearly articulated by the ATO, and it’s important to ensure that you understand your obligations.

The price of cryptocurrencies has surged in recent years. One bitcoin currently equals just under $60,000 Australian dollars. As a result of this financial phenomenon, many investors around the world have managed to make large sums of money in a short period of time. At the same time, many inexperienced investors have jumped on the bitcoin bandwagon and lost large amounts of money as well.

An important thing for those who are already involved in or considering getting into bitcoin and cryptocurrencies are the tax implications for investing and trading these digital products. As cryptocurrencies become more and more entrenched in the mainstream, one of the biggest challenges in accounting for them has been that some investors may not be aware that it is a requirement for them to disclose crypto assets to their accountants.

What is cryptocurrency and how to get it?

Cryptocurrencies, also known as digital currencies, are created and held electronically. Unlike traditional money, cryptocurrencies aren’t printed, and no one controls them. Cryptocurrencies are produced by people and, in more recent times, by businesses who are running computers all over the world, by using software that attempts to solve mathematical problems.

There are estimated to be over 4,000 cryptocurrencies in the world. Bitcoin is the most well-known type of cryptocurrency. Other well-known kinds include Ethereum, Ripple XRP, Litecoin, and NEO.

There are three ways to obtain cryptocurrencies: by mining them, buying them, or providing goods and services in order to earn them.

What is the ATO doing to tax cryptocurrency?

The ATO has estimated that somewhere between 500,000 and one million Australians have currently invested in crypto-related assets. Many of these individuals have failed, or will fail, to properly report the profits they have made for tax purposes.

In response to this common occurrence, the ATO is gathering bulk records from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program which aims to ensure that people trading in cryptocurrency are paying the amount of tax that is required for them to pay.

The data that has been provided to the ATO consists of cryptocurrency sales and purchase information. The data will identify Australian taxpayers who have failed to disclose their income details correctly.

How the ATO taxes cryptocurrencies

Generally speaking, there are no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services using cryptocurrency. An example of this would be purchasing personal goods or services on the internet with bitcoin.

Australian Businesses using bitcoin to buy and sell goods and services

If you are a business owner who has received cryptocurrency for your goods or services, you will need to record the value of the cryptocurrency units in Australian dollars as a requirement when reporting your ordinary income for tax purposes.

Mining cryptocurrency as a business

If your business is mining cryptocurrency, any income resulting from the transfer of the mined digital currency to someone else is included in assessable income. Any expenses which occur as a result of the mining activity are allowed as a deduction.

Taxpayers conducting a cryptocurrency exchange (including ATMs)

If you are running a business that aims to buy and sell cryptocurrency as an exchange service, the proceeds consequent from the sale of the currency are included in assessable income.

Disposing of cryptocurrency acquired for investment

When acquiring cryptocurrency as an investment, CGT will apply, however when the cost of the cryptocurrency does not exceed $10,000 the personal use asset exemption may apply if you can prove that the cryptocurrency was to fund personal consumption.

Record keeping

Every Australian dealing with cryptocurrency needs to maintain the following records for tax purposes: the date of every transaction, the amount in Australian dollars at the time when the transaction was made, why the transaction was made and the details of the other party involved in the transaction.