Cryptocurrencies are on the rise. It’s important to have some idea of what’s going on. Some appreciation of likely tax consequences of the cryptocurrencies and structures around them. We have summarized everything you need to know about it.
The Australian tax consequences for Australian resident investors upon the purchase of cryptocurrency. Upon each release of functionality, varies from taxable to non-taxable based on the differing characteristics of cryptocurrencies.
But before discussing these, let’s define Blockchain first
A blockchain facilitates secure online transactions. It is a decentralized and distributed digital ledger that is used to record transactions across many computers. So the record cannot be altered retroactively without the alteration of all subsequent blocks and collusion of the network.
In basic terms, blockchain technology is a means to record the truth without a trusted intermediary like a bank. A public blockchain is an online, open-source database of transactions that is managed by a network rather than just one entity.
Private and permissioned blockchains are very attractive for business and industry application. A private blockchain is managed by a central authority, which can be one person or organisation or a private consortium. Private blockchain technology might contradict the founding and defining feature of public blockchain technology, which requires transactions to be verified by a decentralised network. However, represents a private testing ground for businesses and private consortiums to experiment with the technology.
Miners share the responsibility for verifying transactions through a consensus (or proof of work) process, which is based on cryptography.
Cryptography is another defining feature of blockchain technology. It is the practice and study of techniques for secure communication in the presence of third parties called adversaries. Cryptography is a process that requires a mathematical equation to be solved before transactions are recorded on a blockchain. Using cryptography, miners compete against each other to find the mathematical equation that successfully verifies the block of transaction data. The first miner to solve the mathematical equation is generally rewarded for its effort and the transactions are recorded as another block on the blockchain.
Now that we’ve defined cryptography and blockchain, let’s now discuss what the tax treatment for these is.
ATO has a guidance paper that provides an overview of the tax treatment for transactions associated with crypto currencies, specifically bitcoin. This guidance also applies to other crypto or digital currencies that have the same characteristics as bitcoin.
Transacting with bitcoin is akin to a barter arrangement, with similar tax consequences. Our view is that bitcoin is neither money nor a foreign currency, and the supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.
You need to keep the following records for bitcoin transactions:
- the date of the transactions
- the amount in Australian dollars (which can be taken from a reputable online exchange)
- what the transaction was for
- who the other party was (even if it’s just their bitcoin address).
Generally, there will be no income tax or GST implications if you are not in business or carrying on an enterprise. You simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using bitcoin).
Where you use bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is $10,000 or less.
On the other side, if you receive bitcoin for goods or services you provide as part of your business, you will need to record the value in Australian dollars as part of your ordinary income. This is the same process as receiving non-cash consideration under a barter transaction. The value in Australian dollars will be the fair market value. It can be obtained from a reputable bitcoin exchange, for example.
Bitcoin for goods or services
Where you are carrying on a business and purchase business items using bitcoin (including trading stock) you are entitled to a deduction based on the arm’s length value of the item acquired.
Starting from 1 July 2017, sales and purchases of digital currency such as bitcoin are no longer subject to GST.
There may also be capital gains tax consequences where you dispose of bitcoin as part of carrying on a business. However, any capital gain is reduced by the amount that is included in your assessable income as ordinary income.
Paying salary or wages in bitcoins
When an employee has a valid salary sacrifice arrangement with their employer to receive bitcoins as remuneration, the payment is a fringe benefit. In Addition, the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act.
In the absence of a valid salary sacrifice agreement, the remuneration is treated as normal salary or wages and the employer will need to meet their pay as you go obligations as usual.
Where you are in the business of mining bitcoin, any income that you derive from the transfer of the mined bitcoin to a third party would be included in your assessable income. Any expenses incurred in respect to the mining activity would be allowed as a deduction. Losses you make from the mining activity may also be subject to the non-commercial loss provisions.
Bitcoin held by a taxpayer carrying on a business of mining and selling bitcoin, will be considered to be trading stock. You are required to bring to account any bitcoin on hand at the end of each income year.
With all the above definitions and explanation, I’m sure you still have a lot of questions on your mind. There is a lot of detail and consequences to understand, in the emerging world of blockchain and cryptocurrencies. Developments and changes continue, and it is hoped this article may have set out a useful starting point.
If you think your tax return will be affected with these activities you can contact us at 02 4732 3844 or visit https://judgeaccountants.com.au so we can discuss these with you.