COVID-19 Update: Prioritising our clients' and associates' health
There’s no doubt the explosive growth of bitcoin and other similar crypto-currencies has been a popular investment choice in recent years. With explosive growth (and periodic crashes), it’s been possible to make and lose substantial sums of money over startlingly short time periods, and many inexperienced investors have been drawn in by this latest monetary craze.
If you’re considering getting into crypto-currencies, or are already involved, you need to understand the tax implications of trading and investing in these new digital products.
Bitcoin is a form of digital currency, created and held electronically. No one controls it and they aren’t printed, like dollars or euros, but rather produced by people and businesses running computers all around the world using software that solves mathematical problems.
It’s the biggest example of a growing category of money known as cryptocurrency.
There are three ways to get bitcoin:
1) By mining them. This refers to the process by which bitcoins are created, in which a computer crunches through a set of difficult mathematical problems and success is rewarded with a bitcoin.
2) By buying them. You can create an ‘online wallet’ by visiting a bitcoin exchange system that puts sellers in touch with buyers. Buyers pay for bitcoins by transferring money via online banking.
3) By providing good and services to earn them. Bitcoin is becoming an increasingly accepted virtual currency used by businesses and individuals around the world, including in Australia.
As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment. According to research produced by Cambridge University in 2017, there are 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.
Generally, there are no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using bitcoin).
Bitcoin is a regarded as a capital gains tax (CGT) asset, so CGT potentially applies whenever an Australian resident sends a bitcoin to another person. However, transactions are exempt from capital gains tax if:
Bitcoins are used to pay for goods or services for personal use – e.g. Expedia hotel bookings, or at a café which accepts bitcoins, and
The cost of the bitcoins used to pay for the transaction is less than $10,000 (this is the exemption for personal use assets).
If the cost of the bitcoins used in the transaction exceeds $10,000, the personal use exemption will not be available and CGT will apply. The capital gain is calculated as the increase in value of the bitcoins between the time they were acquired and the time at which they were disposed.
If you receive bitcoin for goods or services provided as part of a business, you will need to record the value of the bitcoins in Australian dollars as part of your ordinary income for tax purposes. The value in Australian dollars will be the fair market value at which they can be obtained from a reputable bitcoin exchange.
Any time you purchase business items (including trading stock) using bitcoin, you are entitled to a tax deduction based on the ‘arm’s length’ value of the item acquired. There may also be capital gains tax consequences when you dispose of bitcoin for business purposes. However, any capital gain is reduced by the amount that is included in assessable income as ordinary income (which means you won’t be taxed twice on the same amount).
If you are in the business of mining bitcoin, any income derived from the transfer of the mined bitcoin to someone else is included in assessable income. Any expenses incurred as a result of the mining activity are allowed as a deduction.
Losses incurred from the mining activity may also be subject to the non-commercial loss provisions, so they won’t automatically be available to offset against other income (there are tests that need to meet first). Bitcoin held due to the business of mining and selling bitcoin is considered to be trading stock and needs to be brought into account at the end of each income year.
If you are carrying on a business of buying and selling bitcoin as an exchange service, the proceeds derived from the sale of bitcoin are included in your assessable income. Any expenses incurred as a result of the exchange service, including the acquisition of bitcoin for sale, are deductible.
The rules around trading bitcoin for business or profit rather than buying and selling bitcoin as an investment are essentially the same as those applying to share traders versus investors. There are other factors to take into account but broadly, if you are holding the bitcoin with a view to long-term gain, you are likely to be an investor and if you are buying and selling bitcoin over the short term with a view to making profits, you are likely to be a trader.
If you acquire bitcoin as an investment, any profits resulting from the sale are not assessable income and no deductions can be claimed. Capital Gains Tax will apply even if the cost of the bitcoin does not exceed $10,000, but the personal use asset exemption may apply if you can demonstrate the bitcoin was to fund personal consumption.
If the cost of the bitcoin exceeds $10,000, the personal use exemption will not be available and CGT will apply. The capital gain is calculated as the increase in value of the bitcoins between the time they were acquired and the time they were sold.
If the transactions amount to a profit-making undertaking or plan, then the profits on disposal of the bitcoin will be assessable income and you will be regarded as a trader in bitcoin rather than an investor.
Anyone dealing with bitcoin needs to keep the following records:
The date of each transaction
The amount in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
Details of the transaction,
Any associated expenses, like fees and commissions, and
Details of the other party (the bitcoin public address is enough).
If you want to rely on the CGT personal use exemption, you’ll need to be able to demonstrate that you actually used the bitcoin to buy goods and services or that this was your intention.
H&R BLOCK CAN HELP
Our H&R Block accountants are now working online. Book an appointment with an expert.