by Michael Haupt, DFK Hirn Newey

There’s no doubt for us that this year has seen a significant increase in the number of clients investing in the various forms of cryptocurrency. But while the number of crypto investors has been steadily increasing, confusion remains regarding how cryptocurrency is taxed. As with most things tax-related, “it depends”.

What is cryptocurrency?

The ATO defines cryptocurrency as “a digital asset in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain”. If that sounds a little too technical, another way to describe it is “a digital currency that operates independently of a central bank, central authority or government”.

Image for Cryptocurrency

How is cryptocurrency taxed?

There is differing tax treatment depending on whether you:

  • Invest in cryptocurrency for the purposes of making a capital gain through price appreciation
  • Use your cryptocurrency as a personal use asset
  • Trade cryptocurrency with the purpose of profiting from price fluctuations

It is our experience that most people purchase cryptocurrency with the intention of later selling it for a higher price. In this regard, cryptocurrency takes on a similar treatment to those investing in shares or property. In this case, the appreciation in the value of the asset is taken to be a capital gain.

Where the investment has been held for more than one year, the capital gain is able to be discounted by 50%. Any capital losses made are quarantined against other income, but are able to offset future capital gains.

Where your cryptocurrency use is more akin to normal cash, used to purchase everyday items, and has a cost base of $10,000 or less, the ATO provides an exemption for “personal use” assets. In this case, a capital gain is not required to be reported, however, any capital losses made are also not reported.

For those that are purchasing cryptocurrency in a business-like manner, taking advantage of volatility to make a profit, the cryptocurrency is likened to “trading stock”, where the sale proceeds are reduced by the purchase costs, to arrive at the profit. This profit is then taxed at the applicable tax rate for the cryptocurrency owner.

Similar to other investments, the ATO requires the following records to be kept:

  • Acquisition documentation, showing date of purchases and amount purchased
  • Sale documentation, including sale price and date sold
  • The value of the cryptocurrency in Australian dollars at the time of each transaction

As a relatively new asset class, we expect that the ATO’s position on the taxation of cryptocurrencies will continue to evolve.

Information contained in this article is not advice and you should seek formal advice before acting in any of the areas mentioned. If you’d like more information or guidance, please contact Michael Haupt at DFK Hirn Newey.

DFK Hirn Newey | 1143 Sandgate Road, Nundah | 3266 1488