Cryptocurrency – tax implications of ownership

March 2022

Cryptocurrency has become mainstream; in Australia, around one-in-five adults are owners. However, owning cryptocurrency can have tax implications. In this article we look at how owning cryptocurrency is assessed in Australia. Although the tax issues discussed in this article are peculiar to Australia, the general principles are likely to apply in most tax jurisdictions.

Cryptocurrency as an investment

The Australian Taxation Office (ATO) treats the buying and selling of cryptocurrency in the same way as many other investments: if your investments produce income, you will pay tax on that income. As cryptocurrency is a relatively new asset class, the tax return process can appear difficult to navigate. This is especially true if you make many transactions, something made quite easy using a smartphone. So it is important to keep track of, and carefully document, your transactions.  Online tracking software can help with this.

Holders of cryptocurrency fall into three categories for tax purposes:

• investors
• traders
• personal use asset.

The ATO gives further information at ato.gov.au.

Cryptocurrency investors

Most hold cryptocurrency hoping for future growth and will fall into the investor category. If there is an intention to grow wealth and make gains, the ATO will consider them investors.

Cryptocurrency investors are liable for capital gains tax (CGT) when the asset is sold. Investors are entitled to a 50% CGT discount if they hold the cryptocurrency for more than twelve months before selling. Cryptocurrency investors who make a loss can offset that loss against current year or future capital gains.

A common misconception often occurs among Australian investors who mistakenly believe they are only liable for CGT when they sell in Australian dollars, or another government backed currency. This is not the case; a capital gain occurs whenever one cryptocurrency is sold in exchange for another cryptocurrency. Even though the proceeds have not converted to Australian dollars, any gain is still taxed. Likewise, in the same way shares are taxable when gifted, cryptocurrency is also taxed when gifted.

Cryptocurrency traders

Cryptocurrency traders are those who apply a commercial approach to the buying and selling of cryptocurrency, looking to generate income rather than a capital gain. The ATO will consider someone a cryptocurrency trader if their activities are commercial in character, and they are undertaking the trading of cryptocurrency in a business-like manner.

For cryptocurrency traders, the ATO treats all the profit as ordinary income rather than as capital gains. This means the 50% CGT discount does not apply but losses can be offset against other income (subject to certain conditions).

Personal use asset

Anyone using cryptocurrency as a personal use asset to buy goods and services for personal use falls into this category. In this case, the ATO treats the cryptocurrency as cash, and it is free from tax. That said, anyone holding the cryptocurrency for too long, or in the hope it will increase in value, will be treated as an investor and will pay tax on any gains.

The importance of keeping documentary evidence

Whether you are a cryptocurrency investor or trader, it is essential that you keep track of cryptocurrency transactions and back it up with proper documentation. Although many cryptocurrency platforms do not include cryptocurrency tax reports, it is possible to buy them from the platform for a fee. There are also other third-party platforms online that can collate your cryptocurrency transactions to help you prepare tax reports and tax returns. 

Whatever method you choose, it is important you keep track of all cryptocurrency transactions throughout the year to ensure the correct tax treatment and accurate tax returns.

About the author

Simon Dinér
Melbourne, Australia

Simon is a tax manager at Saward Dawson, Russell Bedford’s Melbourne member firm. He specialises in helping individuals with their taxation obligations. Simon strives to achieve the best tax outcome for his clients, both with their annual tax returns and developing tax planning for the future.

Simon leads a team of tax professionals, advising clients on extensive individual taxation issues, and is actively involved in taxation training and advice throughout the firm.

simon.diner@sawarddawson.com.au