What is Cryptocurrency?
Cryptocurrency is a kind of digital currency that uses cryptography to trade. There are more than 1000 kinds of cryptocurrencies that can be traded online. For example, bitcoin is the most primitive and the most popular cryptocurrency. Cryptocurrency is based on the mechanism of decentralization and does not rely on the banking and financial system of centralized supervision system. When cryptocurrency is controlled by a decentralized mechanism, each cryptocurrency applies blockchain technology to record in the financial transaction database. Even though cryptocurrency is obviously different from traditional fiat money, it can be bought and sold just like other assets, and it can also trade the price trend of different cryptocurrencies through spread contracts.
Tax treatment of cryptocurrency - such as Bitcoin
1. Use cryptocurrency for transactions
When you dispose of your cryptocurrency to a third party, there may be a capital gain tax (CGT) event. Therefore, cryptocurrency is a CGT asset. Disposal of cryptocurrency occurs when you sell or gift cryptocurrency, trade or exchange different types of cryptocurrencies, transfer cryptocurrency to traditional fiat currency such as Australian dollars, or use cryptocurrency to exchange goods or services.
- If you obtain capital gain from disposing of cryptocurrency, some or all of the gains may be taxable. Certain capital gains or losses on the disposal of cryptocurrency as an asset for personal use are ignored.
- If the disposal of cryptocurrency is part of the business you operate, the profit you make on the disposal will be assessed as ordinary income rather than capital gains.
- When you have different types of cryptocurrencies, every cryptocurrency is an independent CGT asset. When trading or exchanging one cryptocurrency with another, the market value of the cryptocurrency you receive needs to be denominated in Australian dollars.
If your business involves trading in cryptocurrency, stock rules should be applied rather than CGT rules.
- Cryptocurrency business: profits from the sale of cryptocurrency as exchanging stock in a business belong to ordinary income, and the cost of obtaining the cryptocurrency held as trading stock is deductible.
- Using cryptocurrency for transaction in business: If you do not operate in cryptocurrency business but use cryptocurrency in business activities, you need to regard cryptocurrency as other assets or goods used in your business. If you receive cryptocurrency exchange for goods or services, you need to include the Australian dollar value of the cryptocurrency as part of your ordinary income. If you purchase goods or services by using cryptocurrency, you are entitled to a deduction based on the market value of the business item acquired.
- Profit-making business or commercial transactions: If your intention of the investment of the cryptocurrency is to increase in value, any gain you make for disposal would be treated as a capital gain. If you trade with the purpose or intention of making a profit, and the transaction is part of commercial nature, the transaction may generate ordinary income.
- Wages in cryptocurrency: When the employees have remuneration of cryptocurrency rather than fiat currency, the payment is a fringe benefit.
It is important to keep all records for all transactions involving cryptocurrency, whether you are using cryptocurrency as an investment for personal use or in business.
You need to keep the following records about your cryptocurrency transactions:
- Transaction date
- The market value of the cryptocurrency in Australian dollars at the time of transaction
- The intention of the transaction and the information of the transaction party
- Receipts of purchase or sale of cryptocurrency
- Exchange records
- Records of agents, accountants, and costs
- Digital wallet records and passwords
- Software expense related to tax affairs
Chang Accounting Advisory Pty Ltd, we are CPA practice, if you have cryptocurrency transactions, it needs to be included in the tax return, and we could help customers to process tax treatment of cryptocurrency. If you or your families or friends need our services, please feel free to contact our team for any assistance.
This article is for informational purposes only and does not form part of our advice. This article is based on the Australian Taxation Office (ATO) guideline. Please contact our team if you need any assistance.
Claire Chang, 0497 131 419, claire.chang@changadvisory.com.au, wechat: clairechang26
Michelle Cui, 0433 539 870, michelle.cui@changadvisory.com.au, wechat: michellejc
Claire Chang