Written by Emily Baulderstone:
Have you been taking part in the cryptocurrency market in recent years? If so, are you aware of the tax consequences of these transactions and what records you need to keep?
The ATO have recently announced that they will be collecting data from cryptocurrency digital exchanges and data matching this with what is reported to them in tax returns. Where discrepancies are found they will be contacting tax payers to ensure that they have met their obligations and no errors have been made.
So, what do you need to report?
The taxation of cryptocurrency transactions can be complex and there are many factors to consider. Below we look at just a few key considerations you need to be aware of when determining your tax obligations. These only scratch the surface of the entire tax and cryptocurrency picture but are here to get you thinking about your situation and what action you might need to take.
Value of Consideration
The profit or otherwise you make on your cryptocurrency is determined at the time that you dispose of them, but the value of the consideration you receive is not always clear. Disposing of your cryptocurrency can come in various forms; you may exchange them for fiat currency (EG Australian Dollar AUD), another cryptocurrency, or goods and services. At this point the value for which you are exchanging your cryptocurrency is dependent on what you receive as consideration and will be measured in equivalent Australian Dollars. For example – if you exchange one cryptocurrency for another, the Australian Dollar market value of the new cryptocurrency received is the value of the consideration. It is important to keep a record of what you received in order to calculate the gain or loss to be reported when you lodge your tax return.
Once you know the profit or loss you have made, the tax treatment of this is dependent on how your transaction is viewed by the ATO. If, like many of us, you have engaged in a small number of exchanges and choose to undertake these transactions as a personal investment activity, your gains and losses are taxed under capital gains tax rules. If, however, you transact in cryptocurrencies at a level that is determined by the ATO to warrant a business of cryptocurrency exchange, trading stock rules apply; therefore consideration upon disposal is treated as ordinary income and the cost to acquire the cryptocurrency is deductible as a trading stock cost. The result of applying these two different approaches can have a very different tax outcome so it is important that your situation is considered to be sure the right treatment is being applied.
Personal Use Transactions
In some circumstances the purchase and disposal of cryptocurrency may be considered to be personal use only and therefore not taxable. This view can only be applied if the cryptocurrency is used to purchase a personal use asset or service and there was no intention to make a gain through the transaction. These types of transactions need to be considered on an individual basis to ensure all reporting obligations are met.
As always, please don’t hesitate to contact the MGI Adelaide office if you are not sure on the tax consequences of your cryptocurrency transactions.