Tax on Cryptocurrency

Is the sale of my cryptocurrency taxable?

The ATO regards bitcoin and other similar cryptocurrencies as an asset for capital gains tax (CGT) purposes. When you dispose of your cryptocurrency, whether it is Bitcoin, Ethereum, Litecoin or another, there will be tax implications – unless you are using this for personal transactions under $10,000, as shown on the ATO website. So if you are asking, “am I required to pay tax on cryptocurrency sales?”, the answer is most likely “yes.”

Disposing your cryptocurrency can include selling them for money or directly converting them into another currency. For example, if you were to convert Bitcoin into Ethereum, then you have technically disposed of an asset and would be liable to pay either income or capital gains tax on the market value of the Bitcoin at the time you disposed on them.

Following disposal, the cryptocurrency will be included in your assessable income, as either a capital gain or as ordinary income and included in your tax return. Being treated as a capital gain or ordinary income can have different tax implications if you have had your cryptocurrency for longer than 12 months, due to the 50% capital gains tax discount. Whether it is treated as a capital gain or ordinary income is not so cut and dry, and depends on all the facts and circumstances.

In the case of isolated transactions, a gain is generally ordinary income where the intention or purpose of entering into the transaction is to make a profit or gain, and the transaction was entered into in carrying out a commercial transaction. The factors to consider include the magnitude or the profit sought or obtained, the length of time the currency is held before disposal, and that the currency has no other immediate use other than as an object of trade.

In the case where the cryptocurrency is mined and after two years sold in order to purchase a more stable investment, the gain will be assessed under the capital gains tax provisions, not as ordinary income. If on the other hand, the cryptocurrency is purchased with the purpose of profit and the transaction was entered into in carrying out a commercial transaction, a gain will be assessable income not capital gain.

Some factors in considering whether isolated transactions amounts to a commercial transaction include:

the amount of money involved in the transaction and the magnitude of the profit sought or obtained;
the nature, scale and complexity of the operation or transaction; and
the timing of transaction. The holding of the cryptocurrencies for many years may indicate that transaction was not business or commercial in nature.

Here are some good examples taken from Tax Ruling 92/3 on what a transaction is commercial and when it is not.

Example 1:

Ms Donovan purchased 10,000 shares in a listed public company at a price of $1 each and sold them 18 months later for $2 each. During that period, the company paid one small dividend. Donovan was not carrying on a business of trading in shares. A significant purpose of Donovan in acquiring the shares was to make a profit from an increase in the value of the shares.

The profit made on the sale of the shares is not income. The transaction was merely an investment, not a business operation or commercial transaction.

Example 2:

Mr Goldfinger purchased a number of gold bars for $100,000 and, following a sharp rise in the price of gold, sold the gold bars one week later for $110,000. Goldfinger did not carry on a business and had no previous dealings in gold.

The profit of $10,000 is income and assessable under subsection 25(1) of the Income Tax Assessement ACT 1997. It can be inferred from the objective circumstances (especially the quick sale following a rise in price and the fact that the asset had no immediate use other than as an object of trade) that profit-making was a significant purpose of Goldfinger in acquiring the gold bars. Furthermore, the substantial amounts of money involved and the nature of the asset traded lead to the conclusion that the transaction was commercial in nature.

More information on whether isolated transactions are income, can be found on the ATO website.

Please seek professional advice from an Accountant and ensure that this is applicable to your tax on cryptocurrency situation.

With experience in helping our clients in this field of tax on cryptocurrency, we believe that the team at MAS Tax Accountants Canberra will be able to provide you with the best tax advice and customer services for your cryptocurrency transactions.