What Do You Know of Bitcoin and Cryptocurrency?

What Do You Know of Bitcoin and Cryptocurrency?

What do you know of Bitcoin and cryptocurrency?  Are you invested?  Have you considered your taxation consequences?

The term cryptocurrency is generally used to describe a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on the blockchain.  Cryptocurrency generally operates independently of a central bank, central authority or government.

The ‘blockchain’ in simple terms, is a digital, decentralised public ledger of all cryptocurrency transactions.  As transactions are completed, the record of the transaction adds a block, in chronological order, of which these are made public record to participants in the market.

Tax-dodging Bitcoin investors will be confronted by the full ­investigative powers of the tax ­office.  The ATO has made it clear that they will utilise anti-money laundering legislation due to come into force as the basis for a long-awaited blitz on cryptocurrencies.

The ATO will use compulsory 100-point identification checks for Bitcoin investors, to assist them with data-matching, in an attempt to identify investors in the market.

It has been common perception that due to its anonymity and complexity, cryptocurrency has paved a way for not only tax evasion, but an alternative method for organised crime to utilise.  There are significant instances of unexplained wealth, which has not been taxed & for the above reasons, the ATO has planned a crackdown on cryptocurrency.

Given an increased public knowledge of cryptocurrency market as well as threats made by government authorities worldwide who are making a stand on cryptocurrency, the growth of cryptocurrency and their prices have stagnated, and in some cases dropped significantly.

Under the new anti-money laundering rules, Austrac, Australia’s financial intelligence agency, will have its information-gathering powers extended to digital currency exchanges, particularly cryptocurrency markets, in a bid for greater transparency to prevent money laundering, terrorism financing and tax evasion. Apart from new customer identification obligations, these exchanges will now also be required under law to report any suspicious transactions, as well as any cash transactions of $10,000 or more, which is consistent with all other financial undertakings.

So, what does all of this mean from a taxation perspective, if you have Bitcoin or another form of cryptocurrency?

The ATO state that Bitcoin is neither money nor Australian or foreign currency. Rather, it is property and is an asset for capital gains tax (CGT) purposes. Other cryptocurrencies that have the same characteristics as Bitcoin will also be assets for CGT purposes and will be treated similarly for tax purposes.

Depending on the nature of the investment made into Bitcoin, or the intention of the taxpayer, will generally indicate the taxation consequences.

 

General Nature of Activity

What this could look like

Taxation Consequences

Other Considerations

‘Personal use’ transacting

Purchasing bitcoin and utilising it for a means of buying personal assets.

Generally would be under the value of $10,000

Any gains made on subsequent disposal of currency via making purchases, would be deemed non-taxable.

Further, any losses made are incidental and not recoupable.

Be mindful of the length of time that the Bitcoin is held.

If held for a significant amount of time, without any transactions occuring, would be more likely seen as an investment, hence taxable.

Held for Investment purposes, with minor amount of trades and activity.

Purchasing Bitcoin and holding for a period of time, banking on fluctuations in the price to return a profit.

Longer term view of making profit on initial investment.

Considered as a CGT (Capital Gains Tax) asset.

Consistent with the terms required to be a CGT asset for taxation purposes.

Hence eligible for 50% capital gains tax discount on any gains made, if held longer than 12 months.

Any capital losses made offset-able against future capital gains.

Holding a portfolio with mixed activity.

For example, should some Bitcoin or other cryptocurrency be held for longer term purposes, but other parcels held for shorter term and ‘quick-profit’ making intention, could lead to

Held for investment purposes, with significant amount of trades and activity.

 

Held as trading stock

Purchasing Bitcoin and holding for a short period of time.

Actively reviewing the market, ‘planned’ activity, making large number of trades to profit on margins in initial investment price.

Actively looking for short-term profit on trading.

Business-like manner and operation

Given undertaking with a ‘profit-making’ intention, would be treated on revenue account.

Meaning no access to capital gains concessions, any gains are taxable at ordinary marginal income tax rates, and losses deductible against ordinary income.

As above, may want to consider if holding a mixed portfolio, to separately identify those held for longer term & shorter term.

May assist with potential to access to capital gains tax concessions, and more favourable tax outcome.

 

What to do if you have been involved with Bitcoin and are unsure of the taxation consequences?

Give us a call.

Given the recent emergence of Bitcoin and Cryptocurrencies, there is not a lot of guidance on how people should report their activity, if at all.

Therefore, to avoid a review from the ATO, along with potential fines and penalties, you should consider getting some advice and documenting your activity.

As with any other investment or business activity, each individual taxpayer has the onus of proof, meaning that you should keep documentation and records, which would otherwise indicate the purpose of your activities.

For audit purposes, the ATO can review and amend your income tax returns up to 4 years after lodgement, if they find an error or mismatch.

More importantly, they have the ability to review and amend your income tax return from ANY year, should they suspect fraud and tax evasion.

Given the above timeframes, we believe it would be prudent for anyone with involvement to review their circumstances, gather what documentation you have, and discuss with us, to ensure that you have considered your obligations to the fullest with the ATO.  Further, if you envisage that you will remain involved in the Cryptocurrency market, ensure you keep records detailing your activity, especially if your circumstances appear to be ‘investor’ or ‘trader’ like

By taking reasonable steps to ensure you’ve met your obligations with the ATO, you can sleep better at night, and if you have had a ‘win’ on Bitcoin, know that you’ve paid the commensurate amount of tax.

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