What is Cryptocurrency?
Cryptocurrency is a digital asset designed to work as a medium of exchange (to buy and sell goods without using the legal tender of a country). This digital currency does not exist in a physical form. Many people buy this digital currency as an investment and there are over 6,000 different types, with the most common form being bitcoin.
If you have bought or sold Cryptocurrency (converted legal tender to or from a digital currency), it’s a good idea to think about how this activity may impact your tax return, particularly if you have made a profit.
Your Cryptocurrency disposal (or cashing in) is considered a personal investment, ‘Gain or Loss’, and will be subject to Capital Gains Tax if you are an Australian for tax purposes.
Examples of the activities may include:
- Buying cryptocurrency for yourself
- Mining cryptocurrency as a hobby
- Casually trading Cryptocurrency
When does CGT apply?
A CGT event occurs when you dispose of any Cryptocurrency if you:
- Sell or gift cryptocurrency
- Trade or exchange cryptocurrency for anther crypto or other Government issued currency (e.g. Australian Dollars)
- Convert your cryptocurrency to other Government issued currency; or
- Use it to buy goods or services
If you make a profit (gain) when you dispose of Cryptocurrency you will need to pay tax on some, or all, of that gain. E.g. If you buy Cryptocurrency then later sell or exchange your digital coins at a higher price that gives you a capital gain, you will need to pay tax on that.
If you hold (own) your Crypto for more than a year before selling or trading it, you may be entitled to a 50% Discount on the gain. i.e. You only pay tax on half on the profit(gain)
Capital Gains Tax applies if you have made a profit, but what if you didn’t make any money on the disposal of your Crypto?
If this is the case, you’ll experience a ‘Capital Loss’ this can be used to reduce a capital gain within the same financial year, or it can be carried forward to reduce capital gains in future years, this includes investments outside of Cryptocurrency.
Examples of Cryptocurrency Gains & Losses
In January 2017, Harry discovered bitcoin and believing the digital currency was due for a price increase, Harry purchased 3 bitcoins at $5,300 each as an investment.
By early April 2017, the price of bitcoin had risen to $16,000 so Harry decided to cash out his bitcoin and covert them to Australian dollars. Harry’s initial investment has grown from $15,900 to $48,000, with a capital gain of $32,100 – the $32,100 is subject to CGT with no discount (less than 12 months).
Using a similar scenario:
In January 2017, Harry purchased three bitcoins at $5,300.
By early April 2017, the price of bitcoin had decreased to $1,300 – concerned that the bitcoin wouldn’t increase, Harry sold his bitcoin for a total $3,900. As the proceeds were less than the initial $15,900 investment, Harry made a $12,000 loss which can be used to reduce Capital Gains within the current financial year or can be carried forward to reduce future Capital Gains.
Another scenario where Harry owned the bitcoin for over 12 months
In January 2016, Harry discovered bitcoin and believing the digital currency was due for a price increase, Harry purchased 3 bitcoins at $5,300 each as an investment.
By early April 2017, the price of bitcoin had risen to $16,000 so Harry decided to cash out his bitcoin and covert them to Australian dollars. Harry’s initial investment has grown from $15,900 to $48,000, with a capital gain of $32,100 – Harry receives a 50% discount on the gain as he held (or owned) the bitcoin for longer than 12 months. $16050 of the gain is therefore taxable as a Discounted Net Capital Gain.
What Records Do I Need to Work Out My Capital Gain/Loss?
To work out whether you have a Capital Gain/Loss you will need the following information:
- The date of the purchase transactions
- The value of the Crypto in Australian dollars at the time of the purchase transaction (which can be taken from a reputable online exchange)
- The volume/number of units purchased
- The date of the disposal transactions
- The value of the Crypto in Australian dollars at the time of the disposal transactions (which can be taken from a reputable online exchange)
- The volume/number of units sold or cashed out
It is important to keep good records when transacting with Cryptocurrency to ensure your CGT is calculated correctly.
This advice given is for personal investors in Cryptocurrency only. Investing using another tax structure (e.g. as a company) has different tax rules.