Navigating Tax Implications: Key Considerations for Cryptocurrency Investors with Tax Advisor’s Guidance
If you’re currently invested or planning to invest in cryptocurrency, it’s essential to consult with a tax advisor to determine how your investing or trading activities will be treated for tax purposes. Although cryptocurrency continues to dominate headlines with fluctuating values, there are several tax-related considerations to remember. In this article, we will outline the key issues that you should discuss with a tax advisor.
Understanding Differentiating Factors: Investor, Trader, or Personal Use Asset?
The first thing to consider is whether the investment is as an investor, as a trader, or it is just a personal use asset. A summary of the difference is below.
Investor
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 are 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 under 12 months, you would pay tax on all the gains but could offset current or previous capital losses against the gain. If you make a loss on the investment, it is a capital loss, and you can only offset it against other capital gains now or in the future.
You cannot offset capital losses against regular 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.
Trader
If you run your investing business-like manner, intending to make a profit, 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 are 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 you are a trader, the profits are treated on a revenue account, and you pay tax on the whole profit at average tax rates (without any discount for holding the cryptocurrency for 12 months). The tax rate you pay for the profit then depends on the entity you are structured within. If trading in a personal name or through a trust, the tax will be whatever the individual marginal tax rate is for you. The tax rate will initially be between 25% and 30% if trading through a company.
If you make a loss on 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 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.
Summary
This link here shows the attributes the ATO look at to decide whether it is an investment, business or personal use asset.
Maintaining the required records is vital 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 can find precisely what records must be kept at this link.
We touched on structuring above. Like always, you must review your circumstances to determine what structure best suits your cryptocurrency investing or trading. Examples of structures through which you could conduct these activities are personal name, family trust, unit trust or company.
There are also resources available that will help you find year-end valuations details 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 consult a tax advisors should you get involved in this area.
If you have any questions or concerns in relation to the above, the Kreston Stanley Williamson team is here to assist you. Please don’t hesitate to reach out to us for guidance and discussion.
Author – Michael Goodrick
*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 in this article, you must seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.
