By Alisa Sainoski and Jasmyn Martin-Nicholls

Before you jump in the world of Cryptocurrency (Bitcoin, Ether and Litecoin) you should know the positives and negatives of this multi-billion dollar industry.  The currency is digital, so there is nothing you can touch or hold.  Its value fluctuates in a highly volatile manner.  It is created by anonymous programmers through a methodology that is too complex for most people to understand much less participate in.  Bitcoin in most cases is stored on user’s computers, users face the risk of losing their money if they don’t implement adequate antivirus and backup measures.  In hind sight you are trusting your money to a complex system you don’t understand, people you know nothing about, and an environment where you have no legal remedy.  In the traditional world of investing, this would raise enough red flags to make it a bad idea.

The positives of Cryptocurrencies:

While the use of Cryptocurrencies is anonymous, the transactions themselves are all stored on an open ledger called the blockchain.  Since it is an open ledger the data is available to view by anyone at any time, lending to unparalleled transparency.  However, you cannot track information about a person, you can only see the wallet number and its transactions.  No one can control and regulate the currency issuance and the flow of funds on the account.  Decentralisation makes cryptocurrency independent.

The negatives of Cryptocurrencies:

To get involved with Cryptocurrencies, you must first begin with setting up a ‘coinbase’ account in which transactions are sent between users using software called Cryptocurrency wallets.  When creating a wallet a special password is generated which is almost impossible to crack.  It means that a computer breakdown or loss of password will lead to the loss of coins as well!  Therefore, be sure to save the wallet data on a separate medium.  The prediction of Cryptocurrency price is almost impossible.  As there are lots of factors which can influence price shifting through legislation that continues to form and large players who can strongly influence the market.

If this hasn’t scared you enough, read ahead to see what it is all about and how we deal with the tax implications.  Cryptocurrencies are independent in their operations without a central bank, authority or government.  The Australian Taxations Office’s (‘ATO’) view for Cryptocurrency is that it is a “digital asset in which encryption techniques are used to regulate the generation of additional unit and verify transactions on the blockchain”.

If you thought the ATO was not monitoring Cryptocurrencies think again, they are currently required to be taxed under the capital gains tax (‘CGT’) regime as a capital asset.  Since it is not classified as revenue and the losses are not negatively-geared on your taxable income, the losses are carried forward until you create a capital gain.  Unfortunately we are seeing more and more clients who are not aware of the tax implications and even that it should be reported.  Our advice is it should 110% be reported, especially with the ATO’s crack down using increasingly sophisticated data-matching programs.

Cryptocurrency is determined in Australian Dollars when you exchange cryptocurrency for “fiat currency”, other cryptocurrency or goods and services.  An example to quickly help understand the complexity of Cryptocurrency is:  if you buy or otherwise obtain 1 Bitcoin when it’s worth $3,000 and then sell or spend it all when it’s worth $10,000, you would likely incur a $7,000 tax obligation at the moment you sold or spent it.  Profits and losses are what are taxed and not the overall total transactions for the year, but each separate transaction.  For example you could have made 100 transactions which totalled to $5,000 in losses but when we calculate each of these 100 transactions separately they could equally to a profit of $15,000.

A Cryptocurrency CGT event occurs when you dispose of any digital currency.  If you decide to sell or gift Cryptocurrency, trade or exchange cryptocurrency for another crypto or “fiat currency” or convert your cryptocurrency to Australian dollars each time would result in a CGT event.  Now it is very easy to assume that the total yearly profit or loss would be the amount to declare in your income tax return, however it is not the yearly total but each transaction which has occurred.  It needs to be calculated as the example above with a First In, First out approach which could lead to multiple CGT calculations and instead of having a loss, it could actually be a capital gain which is taxed.

Another way people invest in Cryptocurrency is through Crypto-to-Crypto trading where you are not using any fiat currency (e.g. AUD).  How this works is where you exchange some of your bitcoin holdings for tokens and several other altcoins, without ever converting any of your funds back to Australian Dollars.  How to look at these transactions would be to imagine them as receiving property rather than money in return for the first cryptocurrency.  However, even though trading from crypto-to-crypto means that any gains you’ve made haven’t actually been realised in Australian dollars, CGT still applies.

If you have Cryptocurrency for personal use and not as an investment, you may be eligible for the personal use asset exemption.  The exemptions applies to Cryptocurrency transactions that are used to purchase goods or services for personal use, such as booking hotels online or shopping at retailers that accept digital currency, in addition the capital gains you make are from personal use assets acquired must be less than $10,000.  The ATO have stated that longer the period of time you hold a cryptocurrency the less likely it is to be considered a personal use asset.  Cryptocurrency is not classified as a personal use asset if it is acquired, kept or used as an investment, part of a profit-making scheme or/and in the course of business activities.  If at first you obtained Cryptocurrency for personal use and enjoyment but Bitcoin price sky rockets while you have obtained it and you decide to keep your coins as investments, they will be not be classified as personal use anymore.  However, if you hold Cryptocurrency for at least 12 months before disposing of it, you may be eligible for the 50% CGT discount.

It is essential you keep detailed records of Cryptocurrency transactions.  Important details to keep record of include the date of each transaction, the value of the cryptocurrency in Australian dollars at  time of the transaction, the purpose of the transaction, and details of the other party involved (even if it’s just their crypto wallet address).  If you are using Cryptocurrency for personal use, you will need to keep detailed records to be able to prove you were using it for your own personal use and enjoyment.  Records which you should keep include receipts of cryptocurrency purchases or transfers, exchange records, records of agent, accountant and legal costs, digital wallet records and keys, and software costs associated with the management of your tax affairs.

Nevertheless, we believe Cryptocurrencies will never be smooth sailing as there are still plenty of kinks to be ironed out.  So getting advice is the best way to make sure you don’t end up with a big headache come tax time.  If you would like to discuss more about Cryptocurrencies, please do not hesitate to contact us.

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