Whilst a relatively new area in finance, particularly for retail investors and large financial institutions, crypto currency is currently front and centre for the Australian Taxation Office (ATO).
Crypto is shorthand or an abbreviation of crypto-assets. Crypto-assets are a form of digital assets that include cryptocurrencies, digital or virtual currencies, virtual assets and non-fungible tokens that use cryptography to secure transactions and don’t rely on a financial intermediary.
Here’s a broad range of general information relating to what you need to know about Crypto:
What is Crypto from the ATO’s perspective?
The Australian Taxation Office (ATO) treats crypto-currency as an asset and not a form of money or currency. In addition, Non Fungible Tokens (NFTs) are crypto-currency collectibles or scarce digital assets built on a blockchain and treated using similar taxation principles as other crypto-assets.
Are you a crypto-investor or a crypto-trader?
Tax treatment of profit and loss from Crypto sales depends if you are a crypto trader or investor. So, which are you? This depends on the nature of your crypto activities:
Investor – crypto transactions are assessed on capital account where:
- Buying and holding for the long-term
- Intend to profit over time on the sale of the asset
Trader – crypto transactions are assessed on revenue account where:
- Running a business in crypto for the purpose of earning income from buying and selling crypto
- Generally high repetition and volume of activity
- Activities are organised in a business-like way
At New Leaf Advisory, we provide our clients with guidance as to their appropriate status above, one which requires careful consideration and has major tax implications.
Crypto Investors and Capital Gains Tax
If you’re a crypto-investor and not a crypto-trader (see below to understand the difference, trading one crypto-currency for another, for example Bitcoin for Ethereum, results in a Capital Gains Tax (CGT) event because one crypto-asset has been disposed of and another acquired. The calculation of a gain or loss on disposal is required even though you have not received Fiat currency for the sale.
If you hold the Crypto for more than 12 months then you may be entitled to a Capital Gains Tax (CGT) discount on any gain – if you’re a crypto-investor and not a crypto-trader.
Importantly, transferring crypto between different digital wallets that you own is not considered a taxable event. A digital wallet is an online or software-based place to store your private keys and digital assets such as Crytpo.
Should you gift Crypto, this transaction triggers a capital event based on the market value of the crypto at the time of the gift and the recipient will be required to use this market value as their cost base.
Crypto Traders and Income Tax
Crypto traders generally assume the nature of high-frequency, high-complexity and high-volume transactions where a profit-making intention exists which is not long-term in nature.
Buying and selling
Crypto traders are assessed on their income or losses on a revenue basis.
Transaction types impacting both Crypto Traders and Investors
Staking
If you Stake crypto (where you can ‘lock up’ your Crypto to generate passive yield subject to terms and conditions) and you are then rewarded with additional crypto tokens for this, similar to earning interest on a bank deposit.These additional tokens are considered to be income by the ATO and are taxed on revenue account. The revenue amount assessed is equal to the market value of the coin at the time that it is awarded and this amount also becomes the cost base of these additional tokens for capital gains tax purposes.
Airdops
Airdrops are a marketing tool that distribute crypto assets, at times for free and/or less than market value, through a group of people to build their use and popularity.
Any airdrops or staking income derived from Crypto is assessable as ordinary income based on the market value at the time they were received.
Crypto and Personal Use
Crypto is considered a personal asset if it is held for personal use (or non-taxable use in technical terms) such as you buy crypto purely to purchase goods or services that must be paid for in crypto. Generally, the longer you hold the asset the less likely the ATO will view it as a personal use asset.
Crypto-currency is not a personal use asset should it be kept or mainly used:
- As an investment
- In a profit making scheme
- In the course of carrying on a business
Security with Crypto
One of the security issues with Crypto is that it’s actually super easy to lose it – simply type in the wrong wallet address and it’s gone, never to be retrieved. Should your Crypto be lost or stolen, you may be able to claim a capital loss if you can provide the ATO with evidence of ownership (and loss).
Crypto Washing
The ATO are scrutinising the practice of ‘crypto washing’ where investors are selling off crypto currency at the end of one financial year to utilise losses in that financial year, and then buying the crypto currency back immediately, in the new financial year. Should the ATO identify this behaviour, the loss will be rejected from the taxpayers individual tax return.
What’s next?
Contact New Leaf Advisory for more information relating to crypto-assets and their taxation implications.
