In November 2021, the Commonwealth Bank became Australia’s first bank to allow customers to buy, sell and hold cryptocurrency assets through the CommBank app. But cryptocurrency isn’t the only digital asset in the blockchain universe. Non-fungible tokens or NFTs are one-of-a-kind digital assets. NFTs can be anything digital (like drawings or music), but lately we’re hearing a lot about NFTs in the digital artworld. Ownership of the asset is on the blockchain and some artist can take a percentage of every transaction of that artwork. So artists can make income from the asset over time. If you’re considering investing in cryptocurrency, you should learn more about how these transactions work. At Vault, we have our finger on the pulse and can advise on how these assets will affect your income tax.
Cryptocurrency: Income Or Asset?
If you provide a service and your customer pays you in cryptocurrency, it’s considered income. However, if you create crypto, it’s a capital gains tax (CGT) asset. Crypto tax could apply if you exchange cryptocurrency for Australian dollars or another crypto asset.
ATO And Crypto Transactions
The ATO is using various data collection methods to track these transactions. This includes digital service providers (DSPs) and analysis software. The ATO is also conducting several data-mining projects focused on cryptocurrency and cryptocurrency platforms. So you understand all the financial and tax implications of your crypto transactions to ensure you meet your tax obligations.
When Crypto Is Stolen
If you lose your cryptocurrency private key or your cryptocurrency is stolen, you may be able to claim a capital loss. Usually, if an item can be replaced, it’s not considered lost. A lost private key can’t be replaced. So to claim a capital loss, you need to provide a wealth of evidence about your crypto and the wallet it relates to, including when you obtained and lost the key, how much the crypto cost you, your control of the wallet and transactions to the wallet.
Mining Cryptocurrency As A Hobby
You usually have to pay tax on your cryptocurrency, even if you mine it for fun. There are very few situations where you can generate or transact cryptocurrency without paying tax.
Tax Deductions For Equipment
If you mine crypto as a business, you can claim a deduction for the equipment you buy to generate income. If you don’t carry on a business, the crypto is held as an investment and the equipment isn’t tax deductible. Find out whether the ATO considers that you have a business.
How NFT Artwork Is Taxed
Like other cryptocurrency, you can hold an NFT for personal use. Personal use assets are CGT assets that you keep mainly for personal use or enjoyment.
However, NFT isn’t a personal use asset if you use or keep it:
- as an investment
- for a profit-making scheme
- while carrying on a business.
You will usually work out whether your NFT is a personal use asset when you dispose of it. While you own it, your use of it might change. If you buy a personal use asset for less than $10,000, any capital gains you make from it are disregarded for CGT purposes. All capital losses you make on personal use assets are disregarded, no matter how much you paid. Collectables aren’t personal use assets and may be subject to CGT.
Self-Managed Super Funds And Cryptocurrency
A self-managed super fund (SMSF) can invest in cryptocurrency. Read our page on SMSFs and cryptocurrency. However, just because you can, doesn’t mean you should right now. Like all investments, you need to do your research. The ATO recently found that that Australians held approximately $212 million in cryptocurrency assets as at 30 June 2021, which is only 0.03% of total assets. That’s because cryptocurrency is volatile, which makes it harder to rationalise under Section 62 of the Superannuation Industry Supervision (SIS) Act, particularly if the asset allocation ratio of cryptocurrency assets in the SMSF is high. But, if it’s managed well in the SMSF, Bitcoin or other cryptocurrency could work well as an investment.
Want To Find Out More?
Just explaining cryptocurrency can be difficult, so tread carefully if you decide to generate, transact or invest in crypto. Make sure you fully understand what you’re getting into, including any ramifications for your income tax. At Vault, our crypto tax experts stay up to date with all advice from the ATO and changes in tax and related legislation, which may affect people with crypto. It’s an evolving area that will continue to change. Having us on your side will give you more confidence about diving into his area.