Cryptocurrency – What is it and what are the tax implications?

Cryptocurrency is a purely digital currency that is ‘tokenised’ by cryptography, making it very difficult to counterfeit and effectively enabling it to act in the basic function of any other currency. It is facilitated by a concept known as blockchain technology, which removes the middleman (such as brokers and banks) from transactions, enabling buying and selling with virtually no transaction fees, and virtually no regulation – hello Black Market. Go buy yourself a new liver while you can – the RBA have speculated that it is dubious that such an explosive market will manage to slink around in the shadows in the long-term.

What determines the price of cryptocurrency?

What makes cryptocurrency so unique is its value, which is determined purely by what any given buyer is willing to pay for it. Bitcoin, for instance (the clear leader in the cryptocurrency market) is worth over AUD$65,000* per Bitcoin, which is a direct and sole result of its popularity in the market. Less impressively, Elon Musk’s pride and joy, cryptocurrency’s class clown, Dogecoin, is flatlining at 25c AUD* (practically free – and equally free of any useful function).

Investing in cryptocurrency

Although cryptocurrency was initially conceptualised as currency, it has evolved into an investment opportunity similar to bonds or shares. As a result, investors are buying and selling cryptocurrency with the intention to profit from the transaction. The value of Bitcoin, in particular, has been highly volatile, and it is this surge in investment popularity that has piqued the ATO’s interest.

What are the tax considerations?

Earlier this year, the ATO sent over 100,000 letters to known taxpayers holding cryptocurrency. The letters advised individuals that all cryptocurrency transactions (buying, selling, swapping or exchanging one cryptocurrency for another) are subject to capital gains tax and compulsory disclosure. It’s all fun and games brandishing ethereal currencies around cyberspace until the ATO cottons on.

Selling a cryptocurrency for a profit or gain, like trading in shares, may seem like a somewhat obvious capital gains event. Less obviously, the exchange of one cryptocurrency for another triggers a Capital Gains Tax (CGT) event at the exchange point, with the transaction being treated as a sale for one coin and an acquisition for another. For example, if an investor purchases a Bitcoin for $1,000, and then exchanges it a year later for Ethereum worth $2,000, a $1,000 capital gain is made, and the subsequently held Ethereum has a cost base of $2,000.

A note for taxpayers dabbling in crypto – a 50% general CGT discount is available to individuals who sell or exchange crypto after 12 months of ownership. However, this may be out of the question in such an unpredictable, Dodge-y market.

As cryptocurrency’s popularity increases, it will be interesting to see whether taxpayers begin to classify crypto trading on revenue accounts. I.e. buying and selling so frequently and at a high magnitude so that losses can be recognised as legitimate and deductible expenses, rather than capital losses that can only be offset against capital gains.

ATO penalties on cryptocurrency gains

Whilst cryptocurrency is still relatively new and complex, we expect minimal penalties for taxpayers who put their hand up to amend tax returns from previous years to include missed cryptocurrency transactions. We recommend dealing with this sooner rather than later before the ATO is out for blood.

The ATO is already using sophisticated data-matching technology to track and link transactions. We are even starting to see disposals appear on the ATO prefill reports for certain individuals, so perhaps the unregulated charm of cryptocurrency is already disappearing beyond the veil. It will be interesting to see if this shift works with crypto’s popularity or against it.

If you have any questions on the tax implications of cryptocurrency trading, please speak to your Morrows Tax and Business Advisor.

*These prices are correct at the time of writing this article- December 2021.