ATO answers 10 crypto tax questions that can save you $$$

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ATO answers 10 crypto tax questions that can save you $$$

It’s tax time, so we spoke with the ATO to find out how to comply with Australia’s insanely complicated crypto tax laws.

Even the most well-intentioned traders and investors find Australia’s cryptocurrency tax laws difficult to understand – and even harder to comply with.

Earlier this week, Micky reported about a man who received a $100,000 tax bill for $20,000 worth of coins went viral, and was read by tens of thousands.

So we got in touch with the Australian Tax Office (ATO) to clear up a few myths and to find out exactly what you need to do to stay on the right side of the law at tax time.

We’ve translated their bureaucratic language into English – but if you’d like more detail or need to rely on comprehensive information to prepare your tax return, you can find their answers in full at the end of the article.

  1. What information do you need to record to accurately estimate your taxes in relation to crypto?

You need to keep records of the date of the transaction, the currencies involved and who you traded with.

You’ll also need to convert it to Aussie dollars at the time of the transaction.

The ATO accepts receipts, .csv records from exchanges, and digital wallet records.

  1. How can I accurately work out the value of a coin in Australian dollars, when it isn’t traded on any Australian exchanges?

You can use any reputable online exchange to work out the value.

If you have to, you can convert it into Bitcoin or US dollars first, and then convert that to Aussie dollars (again, at the time of the transaction).

Keep records of how you worked it out.

  1. Some cryptocurrencies like VeChain and Neo provide dividends in the form of Gas or Thor. How is capital gains calculated on this?

The tax office treats this like dividends from shares or interest on a bank account. It’s assessable income and needs to be declared as such on your tax return.

HOWEVER: you’ll also need to record the market value at the time you receive it, in order to work out capital gains when you sell it.

Yes, that’s going to be incredibly difficult and time consuming.

(If you haven’t kept records of these ‘dividends’ so far, Adrian Forza from Crypto Tax Australia suggested a possible solution would be to work out the average price across the time frame you received them).

  1. I’ve made 10,000 trades over the past five years and don’t have any accurate records – what should I do?

You’re going to have to recreate records for every one of those 10,000 trades – talk to your exchange, research on the internet, do whatever you have to do.

A tax agent specializing in crypto might be your best bet.

If you honestly can’t work it out, contact the ATO and fess up.

Australia's crypto and Bitcoin tax laws require a lot of effort to comply with.
Australia’s crypto and Bitcoin tax laws require a lot of effort to comply with.
  1. Many people both invest in Bitcoin and buy things with it. Is crypto taxed differently if I’m just using it to purchase goods on the internet rather than investing it in the expectation of gains? How do I define the difference and prove it to the ATO?

Crypto as an investment: You bought it hoping it would go up, it did, and you sold it.

The difference between what you paid for it, and what you sold it for, is the capital gain.

It doesn’t matter if you bought BTC for $1 and it’s now $10,000 if you haven’t sold it.

If you waited 12 months to sell it, you can probably get the CGT discount. Make sure you record any losses when you sell. You can use them to offset gains when you finally make some money. You can’t deduct losses from your other income though.

Crypto for buying stuff (‘a personal use asset’)

If you have crypto worth less than $10k that you use to buy stuff with, then it may not incur capital gains or losses.

This is easier to prove if you only have it for a short time. If you have had it for a long time, the ATO will probably decide it’s not really a ‘personal use asset’.

In addition, it won’t be seen as a ‘personal use asset’ if you exchange it for Aussie dollars first, or if you use an intermediary like a payment gateway or bill payment service rather than buying stuff with crypto directly.

  1. The ATO now does data matching with Australian exchanges. However, I buy Ethereum on Australian exchanges and send it to other platforms like Binance to buy the coins I want. Will this cause me grief when the ATO ‘data matches’ the records on the exchange and finds I’ve sent $20,000 offshore?

The ATO didn’t really answer this one, but said they have other sources of information (such as AUSTRAC data) about money transfers to and from Australia – especially if you convert it overseas to fiat and send it back home.

They’re also working with other jurisdictions on sharing data (this is reportedly quite advanced).

Your best bet is to keep all the same records as you would for Australia and report it to the ATO. Bear in mind, you might have to pay tax overseas as well.

  1. If I’ve bought and sold a cryptocurrency almost immediately (as in the above question) do I still need to calculate capital gains?

Yes, unless it was worth less than $10k and you immediately bought something with it.

  1. Can I write off my subscription to crypto investing services, and record keeping services like CoinTracking?

Only if you’re an actual business.

  1. How do I calculate capital gains on mined cryptocurrencies?

If the crypto mine is a ‘business’ then any crypto you produce is classified as ‘trading stock’ and treated as assessable income at the end of the year.

Weirdly or not, if the price goes up, this is still treated as assessable income, whether or not you sell it. Costs can be deducted and you can claim depreciation on the gear. Losses can be deducted from other income.

If it’s not a business then standard CGT rules apply when you sell it.

  1. How do I know if I’m an ‘investor’ or a ‘trader’ under the ATO guidelines, and what effect does it have?

If you plan on buying, holding for a bit and selling for a profit, you’re an investor.

To be classified as a trader, you need to have a business, which means you need to conduct commercial activity in a commercially viable way, act like a business (insomuch as you have a business plan, market the business name, keeping proper accounting records, etc) and genuinely believe you’ll make a profit at some point.

Bear in mind that businesses can buy and sell a bit of crypto without being traders.

For more information on the classification of a business click here.

For more information on cryptocurrency taxation in Australia, click here.

Preparing your tax return is not going to be an easy job.
Preparing your tax return is not going to be an easy job.

Here are our questions to the ATO and their answers in full:

  1. What information do you need to record to accurately estimate your taxes in relation to crypto?

You will need to keep the following records in relation to your cryptocurrency transactions:

  • the date of the transactions
  • the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
  • what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).

These records can include:

  • receipts of purchase or transfer of cryptocurrency
  • exchange records
  • records of agent, accountant, and legal costs
  • digital wallet records and keys
  • software costs related to managing your tax affairs
  1. How can I accurately work out the value of a coin in Australian dollars, when it isn’t traded on any Australian exchanges?

You can use the value established from a reputable online foreign exchange. Depending on the coin you are valuing, you may need to establish a value in a foreign currency (like US dollars) or in another cryptocurrency (like Bitcoin) and then convert that amount to Australian dollars. You should keep records showing how you established the value of the coin, including details of the foreign exchange and conversion rates you used.

If the cryptocurrency you received cannot be valued, the capital proceeds from the disposal are worked out using the market value of the cryptocurrency you disposed of at the time of the transaction.

  1. Some cryptocurrencies like VeChain and Neo provide dividends in the form of Gas or Thor. How is capital gains calculated on this?

Similar to dividends received while holding shares or interest received on a bank account, the value of the cryptocurrency received (Gas or Thor) for holding another cryptocurrency (VeChain or Neo) is assessable income at the time you receive it and must be declared as income in your tax return.

However, as the cryptocurrency received (Gas or Thor) is also a CGT asset, it will be dealt with under the CGT provisions when you dispose of it (assuming you are not in business). The cost base of the cryptocurrency (Gas or Thor) is its market value at the time you acquired it. You will make a capital gain if the capital proceeds from the disposal are more than the cost base of the cryptocurrency.

  1. I’ve made 10,000 trades over the past five years and don’t have any accurate records – what should I do?

You would need to recreate your records by establishing the information described in Questions 1 and 2. You may be able to obtain information from your exchange or your bank to help you do this. You may also be able to gather information from your wallet(s) and the blockchain.  A registered tax agent experienced with cryptocurrency may also be able to assist.

If after trying the above and taxpayers are still are having difficulties, taxpayers are encouraged to contact the ATO to discuss their circumstances with us.

  1. Many people both invest in Bitcoin and buy things with it. Is crypto taxed differently if I’m just using it to purchase goods on the internet rather than investing it in the expectation of gains? How do I define the difference and prove it to the ATO?

A CGT event occurs when you dispose of your cryptocurrency. This is the case whether you sell cryptocurrency to make a gain, or use cryptocurrency to purchase goods or services; however, they may have different tax outcomes.

Cryptocurrency as an investment

You will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its cost base. Even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.

However, if you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.

If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You cannot deduct a net capital loss from your other income.

Cryptocurrency as a personal use asset

Some capital gains or losses that arise from the disposal of a cryptocurrency that is a personal use asset may be disregarded. Personal use assets are CGT assets used or kept mainly for personal use or enjoyment.

Only capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded.

Where cryptocurrency is acquired and used within a short period of time, to enter directly into transactions to acquire items for personal use or consumption, the cryptocurrency is more likely to be a personal use asset.

However, where the cryptocurrency is acquired and held for some time before any such transactions are made, or only a small proportion of the cryptocurrency acquired is used to make such transactions, it is less likely that the cryptocurrency is a personal use asset. In those situations, it is more likely to be held for some other purpose, such as:

  • an investment
  • in a profit-making scheme, or
  • in the course of carrying on a business.

Except in rare situations, the cryptocurrency will not be a personal use asset:

  • when you have to exchange your cryptocurrency to Australian dollars (or to a different cryptocurrency) in order to purchase items for personal use or consumption, or
  • if you have to use a payment gateway or other bill payment intermediary to purchase or acquire the items on your behalf (rather than purchasing or acquiring directly with your cryptocurrency).

To show cryptocurrency was used for a particular purpose the information described in Questions 1 and 2 would need to be kept to show when the cryptocurrency was acquired, how long it was held and what it was used to acquire, if anything.

  1. The ATO now does data matching with Australian exchanges. However, I buy Ethereum on Australian exchanges and send it to other platforms like Binance to buy the coins I want. Will this cause me grief when the ATO ‘data matches’ the records on the exchange and finds I’ve sent $20,000 offshore?

Data matching with Australian exchanges is one source of data amongst many that allow the ATO to understand a taxpayer’s obligation.  For example, the ATO also uses AUSTRAC information which may also provide data on money transfers to and from Australia, in particular, if you convert your coins held in a foreign exchange to fiat and repatriate those funds to Australia.  The ATO is also working with other jurisdictions on improving the exchange of information where we believe there may be compliance risks.  If all these and more data sources give rise to possible inconsistencies with what is reported on a taxpayer’s tax return then we may contact the taxpayer.

The acquisition or disposal of an asset on a foreign exchange is treated the same as the disposal of Ethereum on a foreign exchange and may result in a gain or a loss that has to be declared in your income tax return. The record keeping requirements identified at question 1 apply equally to transactions undertaken on a foreign exchange. You may also have tax consequences in the foreign country where the exchange is based.

7. If I’ve bought and sold a cryptocurrency almost immediately (as in the above question) do I still need to calculate capital gains?

Yes, you need to calculate the capital gain unless the cryptocurrency is a personal use asset (as described at question 5) and was acquired for less than $10,000.

8. Can I write off my subscription to crypto investing services, and record keeping services like CoinTracking?

Subscriptions to these services are usually only deductible if you are carrying on a business.

Not all people acquiring and disposing of cryptocurrency will be carrying on a business. To be carrying on business, you will usually:

  • carry on your activity for commercial reasons and in a commercially viable way
  • undertake activities in a business-like manner. This would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan
  • prepare accounting records and market a business name or product
  • intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term.

However, if you hold cryptocurrency for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.

9. How do I calculate capital gains on mined cryptocurrencies?

This will depend on whether the mining activity constitutes a cryptocurrency mining business. The factors described in question 8 are relevant to determining whether you are carrying on a business.

If you are carrying on a business of mining cryptocurrency:

Any income that you derive from the transfer of the mined cryptocurrency to a third party would be included in your assessable income.

Any expenses incurred in respect to the mining activity – including electricity costs – would be allowed as a deduction. The cost of capital assets, such as hardware and software can be depreciated over their effective life.

As a miner carrying on a business, any cryptocurrency that you acquire from mining is treated as ‘trading stock’. As in any other business, proceeds from the disposal of trading stock are assessable income. Even if you don’t dispose of your cryptocurrency, an increase in the total value of your trading stock over the course of the income year is treated as assessable income (while a decrease is treated as an allowable deduction). This is also referred to as ‘bringing your trading stock to account’ at the end of the year. There are three methods for working out the value of trading stock at the end of the year. For further information about valuing trading stock see information on our website about valuing-trading-stock.

Losses you make from a mining business will be deductible against your other income, however, losses you make may be subject to the non-commercial loss provisions.

Your net income is the amount that is included in your assessable income, and you will pay tax on this income at your marginal rate.

If you have undertaken mining activities that are not part of a business, the cryptocurrency you mine will be subject to the capital gains tax (CGT) rules. This means that the CGT rules would apply. No deductions would be allowable. The CGT rules would need to be applied on the disposal of the cryptocurrency.

Although you may view your mining activities as a hobby, the personal use asset exemption rules may not apply to exclude any capital gains made on the disposal of the cryptocurrency. Refer to the discussion at question 5 about when a cryptocurrency will be a personal use asset.

10. How do I know if I’m an ‘investor’ or a ‘trader’ under the ATO guidelines, and what effect does it have?

The factors described in question 8 are relevant to determining whether you are carrying on a business of trading in cryptocurrency.  The tax consequences are as described in question 9, and your income is assessed as ordinary income.

If you are not carrying on business, but are acquiring cryptocurrency in order to make a gain from its disposal, then you are investing in cryptocurrency.  The tax consequences are as described in question 5, and your gains are assessed as capital gains.

There can also be situations where you may invest in cryptocurrency as part of a commercial or business like transaction or series of transactions with a profit-making intention.  Where this is the case the transaction will give rise to ordinary income rather than a capital gain. Whether there is the necessary profit-making intention and business or commercial character of the transaction will depend on the particular facts and circumstances of each case.  Relevant considerations for working out whether a transaction has such a character, include:

  • the nature of the entity undertaking the transaction
  • the nature and scale of other activities undertaken by the entity
  • the amount of money involved and the scale of the profit sought or obtained
  • the nature, scale, and complexity of the transaction
  • the length of time over which the transaction occurs
  • whether the property, in this case, the cryptocurrency, had any other use other than as an object of trade (for example, is it used as a medium of exchange or to buy services only available on the blockchain?)

Further specific information is available on our website in relation to transacting with cryptocurrency:

https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia—specifically-bitcoin/

The ATO also has general guidance on whether you are conducting a business:

https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Are-you-in-business-/