The ATO knows about your cryptocurrency assets!
Traditional tax rules apply to this non-traditional asset class.
However, due to the vast array of cryptocurrencies and NFTs and the different ways they are traded, tracked and valued, calculating their tax treatment can be very complex.
So what is a cryptocurrency and a NFT?
A cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of the units of currency and verify the transfer of funds, operating independently of a central Bank (from Oxford dictionary).
Cryptocurrency in the following commentary refers to Bitcoin or other crypto or digital currencies with similar characteristics to Bitcoin.
A Non-Fungible Token (NFT) is a unit of data stored on a digital ledger, are unique and are therefore not interchangeable.
Key questions to be considered for tax treatment
What records need to be kept for cryptocurrency transactions?
- the date of the 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
- Receipts of purchase or transfer
- Exchange records
- Agent, accountant and legal costs
- Digital wallet records and keys
- Any software costs related to managing tax affairs
It is crucial to keep good records for all your transactions with cryptocurrency, whether you are using cryptocurrency as an investment, in business or for personal use.
Is a cryptocurrency or NFT a Capital Gains Tax (“CGT”) asset?
Generally, cryptocurrency and NFTs are treated like shares and many other investments, so they are regarded as CGT assets. They are investments which investors hope to grow in value over time to give capital gains.
A CGT event occurs when you dispose of your cryptocurrency. A disposal can occur when you:
- sell or gift cryptocurrency
- trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
- convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars, or
- use cryptocurrency to obtain goods or services.
If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed.
If cryptocurrency investments are held for longer than 12 months, you may be entitled to a CGT discount of up to 50% to the reduce the capital gain made on disposal.
When could cryptocurrency or NFT activity be treated as a business?
To be carrying on a business, the following need to be considered:
- the nature and purpose of the activities
- the repetition, volume and regularity of the activities
- whether there is a business plan and the activities are organised in a business-like way.
If you are in business, then trading stock rules apply rather than CGT rules. This means the disposal of cryptocurrency in this business results in:
- the cost of acquiring the crypto being trading stock and is tax deductible; and
- profits made are assessable as ordinary income, not as a capital gain.
In this instance, the 50% capital gains tax discount does not apply.
When is cryptocurrency a personal use asset?
Personal use assets are CGT assets that are being kept mainly for personal use.
Some capital gains or losses from disposal of cryptocurrency that are personal use assets may be disregarded.
Cryptocurrency is not a personal use asset if it is kept or used mainly:
- as an investment
- in a profit making scheme
- in the course of carrying on a business.
The longer the asset is held the less likely it is a personal use asset. The time of disposal is when the asset is determined whether it is a personal use asset or not. The treatment of cryptocurrency may change over time as it may start out as being for personal use but then end up being an investment making a profit on disposal or be part of a business.
How are values determined, tracked and accounted for?
As mentioned above, accurate record keeping is very important. Crypto Exchanges and specialised software may be able to provide the relevant information.
Since 2014, the ATO has been able to “pre-fill” some cryptocurrency information into tax returns.
Can Self-Managed Superannuation Funds (“SMSFs”) invest in cryptocurrency?
While SMSFs are not prohibited from investing in cryptocurrencies, the investment must:
- be allowed for under the fund’s trust deed
- be in accordance with the fund’s investment strategy
- comply with SISA and SISR regulatory requirements concerning investment restrictions.
Given the complexity around SMSFs, we strongly encourage SMSFs to seek professional advice from us before undertaking any new investment in their SMSF, including investments in cryptocurrencies.
We are here to help
The ATO provides a number of determinations / guidance notes to support the tax calculations for crypto and NFT activities. These items help to support achieving appropriate tax outcomes.
We would be happy to advise you on what is required to maintain tax compliance for your cryptocurrency and NFT activities.
We also can assist with compiling the necessary supporting information to support your tax obligations.
Please contact your Ruddicks adviser as soon as possible to ensure that the necessary information is in place to support your cryptocurrency and NFT activities.
Want to learn more?
Check out the ATO’s Tax-smart tips for your cryptocurrency investment here.
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The content of this newsletter is general in nature. It does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. Ruddicks accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. This information is current as at 9 February 2022, and was published around that time. Ruddicks particularly accepts no obligation or responsibility for updating this publication for events, including changes to the law, the Australian Taxation Office’s interpretation of the law, or Government announcements arising after that time.
Any advice provided is not ‘financial product advice’ as defined by the Corporations Act. Ruddicks is not licensed to provide financial product advice and taxation is only one of the matters that you need to consider when making a decision on a financial product. You should consider seeking advice from an Australian Financial Services licensee before making any decisions in relation to a financial product. © Ruddicks 2022