Cryptocurrency is still the flavour of the month with news of increasing and decreasing values in the news media almost everyday. From a tax viewpoint there are issues to be considered to determine how your investing or trading will be treated. Below we go through the issues you need to consider if you are, or are planning to, invest in cryptocurrency.
The first thing to consider is whether the investing is as an investor, or as a trader, or it is just a personal use asset. A summary of the difference is below.
If you are buying and selling cryptocurrency as an investment then it is likely that any profits would be treated as capital gains. Transactions that would be seen as investing would include, but is not limited to,
- Buying coins as a long-term investment – buy and hold!
- Investing, but in a non-business like fashion with a low level of transactions.
If you are an investor the profits are seen as capital gains and, if you have held the cryptocurrency for more than 12 months, you would only pay tax on half of the gain, at your entity’s tax bracket. If held for less than 12 months you would pay tax on all of the gain, but you could offset current or previous capital losses against the gain. If you make a loss on the investment, then it is a capital loss and you can only offset against other capital gains either now or in the future. You cannot offset capital losses against normal income. The tax rate you pay on the gains depends on what name the asset was put in. The discount for holding an asset for more than 12 months will not be available should you invest in a company name. Your individual circumstances will determine what name to put the cryptocurrency asset in.
If you are running your investing in a business like manner, with the intention to make a profit then you could be seen as a trader. Characteristics that would suggest a business are as follows;
- Your intention from the start is to make a profit on resale;
- High repetition, volume and regularity of your activities;
- The size and scale of the activity is consistent with running a business; and
- Your activity is planned, organised and carried out in a businesslike manner. This may include keeping business records, having a business plan, separate bank account and putting significant amounts of time and research into the business activities.
If a trader, then the profits are treated on revenue account, and you pay tax on the whole profit at normal tax rates (without any discount for holding the cryptocurrency for 12 months). The tax rate you pay on the profit then depends on what entity you are structured within. If trading in a personal name or through a trust then the tax will be whatever the individual marginal tax rate is for you. If trading through a company the tax rate will initially be between 25% and 30%. If you make a loss on the cryptocurrency trading, that loss is available to offset against other income you may have made from other sources (subject to certain restrictions). Again this will depend on what entity you are structured within.
Personal Use Asset
Some cryptocurrency is held for personal use. This may be to allow certain goods and services to be purchased using the cryptocurrency. If this is all it is held for, and there is no intention to hold long term or to make a profit from it, then any gains or losses made on the cryptocurrency will be disregarded for tax purposes.
This link here shows the attributes the ATO look at to decide whether it is an investment, business or personal use asset.
It is important that maintain the required records to allow the investing or trading to be quantified at year end. You will need to keep records that allow you to record the following;
- The date of the transactions;
- The value of the cryptocurrency in Australian dollars at the time of the transaction; and,
- What the transaction was for and who the other party was.
You will be able to find exactly what type of records need to be kept at this link.
We touched on structuring above. Like always, you need to review your personal circumstances to determine what structure best suits your particular cryptocurrency investing or trading. Examples of structures that you could conduct these activities through are personal name, family trust, unit trust or company.
There are also resources available that will help you to find year end details of valuations and other required information. An example of this is seen here.
Cryptocurrency is a new and dynamic asset class that you may not be on top of yet. Hopefully the above information will help you, should you be getting involved in this area.
If you have any queries in relation to the above, don’t hesitate to contact your client manager.
Author – Michael Goodrick, Managing Partner at Kreston Stanley Williamson
*Correct as of 15 November 2021
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.