Crypto-currency – the income tax implications

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By Kim Reynolds and Michael Craig

With the ever increasing use of Bitcoin in various scenarios ranging from digital currencies to investment, a question that we find we are being asked more and more frequently is – what are the tax implications of venturing into the world of crypto-currency?

Well, the simple answer is…it depends! The ATO has now released some guidelines on the income tax implications and outline a number of situations where an individual may hold crypto-currency and the treatments upon sale. We discuss a few of these situations below:

Transacting with Bitcoin in your business

Currently the ATO takes the view that transacting with Bitcoin is akin to a barter type arrangement, and as Bitcoin is neither money nor a foreign currency it is treated in the same way for tax purposes.

Therefore, where you receive Bitcoin as a digital currency in exchange for goods or services, you will need to record the market value in Australian dollars as part of your income. Similarly, where you purchase business items using Bitcoin, any deduction will be based on the market value of the item being purchased.

But what if you are in the business of mining Bitcoin? The ATO considers the mining of Bitcoin to be a business venture and the tax treatment of such as follows:

  • Income derived from transferring mined Bitcoin to a third party is included as assessable income;
  • Expenses incurred in relation to mining Bitcoin are allowable deductions;
  • Losses from Bitcoin mining may be subject to the non-commercial loss provisions; and
  • Bitcoin held by miners is likely to be considered trading stock.

Also be careful if you are registered for GST! This will need to be considered in all situations when you are carrying on an enterprise.

Bitcoin as an investment

In recent times the popularity of Bitcoin has skyrocketed with people chasing investment gains that are unprecedented in their returns. Your original intention on purchase is important in determining the tax treatment.

Where your intention is consistent with being a long term investor, then your investment gains will be more likely to be taxed as a capital gain and you may be entitled to the general 50% capital gains discount, for example if the investment is held for more than 12 months.

However, where your transactions amount to a profit-making undertaking or plan, then the profits on disposal of the Bitcoin will be treated like normal income.

Personal transactions

Where you are not in business or carrying on an enterprise, but are dealing with Bitcoin or other crypto currencies as a hobby, certain non-commercial loss rules may limit access to losses incurred. Also where the purchase cost is less than $10,000 and purely for personal use there will generally be no tax implications for transacting in Bitcoin.

However, transactions that are greater than $10,000 may be subject to tax implications on any disposal gains.

Want to know more?

In reality, the income tax treatment of crypto-currencies like Bitcoin is an evolving space with legislators trying to keep up with the level of activity – and, as such, it can be complicated.   If you want to know more about the issues discussed in this article, please contact Kim Reynolds our Business Advisory Director for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

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