Cryptocurrency and Tax Obligations

Do you understand your Cryptocurrency and Tax obligations relating to your Cryptocurrency purchases and disposals in Australia? 

Your tax responsibilities vary depending on your circumstances, but you need to keep records for all cryptocurrency transactions.

What is Cryptocurrency?

Cryptocurrencies are also known as virtual currencies or digital currencies. They are a form of digital token.

There are many different types of cryptocurrency – Bitcoin, Tether, Ether and many others. They are created from code using an encrypted string of data blocks, known as a blockchain.

Tax responsibilities

When you buy, sell or invest in cryptocurrency, you need to be aware of your tax responsibilities.

Any transactions with a foreign cryptocurrency exchange you may have tax responsibilities in another country.

Follow these 3 steps to help you manage your tax responsibilities with cryptocurrency.

1. Report disposal of cryptocurrency

You must report a disposal of cryptocurrency for capital gains tax purposes. Disposing occurs when you either:

• exchange one cryptocurrency for another cryptocurrency
• trade, sell or gift cryptocurrency
• convert cryptocurrency to a fiat currency (a currency established by government regulation or law), for example to Australian dollars (A$).

Transferring cryptocurrency from one digital wallet to another digital wallet is not considered as a disposal as long as you maintain ownership of it.

When your cryptocurrency holding reduces during this transfer to cover the network fee, the transaction fee is a disposal and has capital gain consequences.

2. Work out any CGT

Any cryptocurrency exchanged for goods, cash or other cryptocurrencies, it is normally considered a disposal for the purposes of capital gains tax (CGT) and you may need to include a capital gain or loss in your tax return.

To work out your capital gain or loss, you need to determine the value of your cryptocurrency purchases and sales in Australian dollars. A capital gain or loss is the difference between the:

• cost base (cost of ownership, including the purchase price plus certain other costs associated with acquiring, holding and disposing of it)
• capital proceeds (what you receive or the market value of what you receive) when you dispose of your cryptocurrency.

If you:

• buy cryptocurrency using Australian dollars, the amount you paid is included in your cost base;
• exchange one cryptocurrency into another cryptocurrency, your cost base is the market value in Australian dollars of the cryptocurrency at the time of the transaction

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.

3. Keep records

Records of all transactions associated with acquiring, holding and disposing of cryptocurrency are required to be kept for five years after you dispose of the cryptocurrency.

You can find further information regarding cryptocurrency and tax obligations here .

Should you have any questions or would like to discuss this article further, the team at Gerard Wilkes & Associates are here to help. Do not hesitate to contact us at https://www.wilkes.com.au/contact-us/ or call our office 07 5532 1733.