As we are now seeing an increasing number of clients investing (or contemplating investing) in cryptocurrency, we believe it is timely to comment on:
- What is Cryptocurrency
- Taxation aspects of investment in Cryptocurrency
- Record-keeping requirements for Taxation Purposes.
- Australian Taxation Office (ATO) data-matching program
1) This blog is not intended for the purpose of giving investment advice. We recommend you seek advice from a qualified Investment Advisor if you are considering investing in Cryptocurrency.
2) Our comments around taxation implications are general in nature and may/may not apply to your specific circumstances. Please seek our specific advice in relation to your own circumstances.
What is Cryptocurrency?
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency as an investment
If you decide to acquire cryptocurrency as an investment, there are capital gains tax implications when you make a disposal of the cryptocurrency.
You will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its cost base. Even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.
If you hold the cryptocurrency as an investment, you will not be entitled to the personal use asset exemption. However, if you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.
If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You can’t deduct a net capital loss from your other income.
You must keep records of each cryptocurrency transaction to work out whether you have made a capital gain or loss from each CGT event.
When does a disposal of Cryptocurrency occur?
A disposal can occur when you:
- sell or gift cryptocurrency
- trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
- convert cryptocurrency to flat currency (a currency established by government regulation or law ), such as Australian dollars, or
- use cryptocurrency to obtain goods or services.
It is often not understood that if you exchange one cryptocurrency for another that you have in fact disposed of the first currency (which has taxation implications) and acquired another cryptocurrency.
Record-keeping for Cryptocurrency
It is important to keep good records for all your transactions with cryptocurrency.
In our experience to date, we have noticed that some of the institutions our clients have used are not providing adequate reports to enable us to prepare clients Income Tax Returns.
The following records must be kept in relation to your cryptocurrency transactions:
- the date of the transactions
- the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).
- Capital Gains Tax Report clearly summarising
- Short term gains & losses (ie. less than 12 months)
- Long term gains & losses (ie. greater than 12 months)
If the investment is made by a Self-Managed Superannuation Fund, the following further records need to be kept:
- The number of units of Cryptocurrency held at 30 June each year and the cost & date of acquisition of each currency
- The market value of Cryptocurrency held at 30 June each year
Your records should also include:
- receipts of purchase or transfer of cryptocurrency
- exchange records
- records of agent and legal costs (if any)
- digital wallet records and keys
- software costs related to managing your tax affairs
Australian Taxation Office (ATO) data-matching program
The Australian Taxation Office (ATO) cryptocurrency data-matching program has been in place since April 2019.
The ATO obtains data relating to cryptocurrency transactions and account information from designated service providers (DSPs). The data obtained is used to identify the buyers and sellers of crypto-assets and quantify the related transactions.
The ATO matches the data provided by DSPs against ATO records to identify individuals who may not be meeting their registration, reporting, lodgment and/or payment obligations.