The tax consequences of using cryptocurrency A cryptocurrency is defined as a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It remains largely unregulated but with the number of collapses rising, this is likely to change in the future. Bitcoin was created in 2009 by Satoshi Nakamoto as the world’s first cryptocurrency and is the biggest. Cryptocurrency is produced by people using computer software that solves mathematical problems. This process is known as mining. As at August 2022, cryptocurrency had the following statistics:
There are over 20,000 different cryptocurrencies.
4.6 million Australians own cryptocurrencies.
The total market cap of all cryptocurrencies is $1 trillion.
Over $100 billion of cryptocurrencies trade every day.
Bitcoin has the highest current market cap at over $420 billion - more than double its closest rival Ethereum.
Four of the top 20 cryptocurrencies are directly pegged to USD value - Tether, USD Coin, Binance USD.
21% of the US population has traded or used cryptocurrency.
As a continent, Asia has over 4x more cryptocurrency users than any other continent.
In a nutshell, the tax consequences of using cryptocurrency are as follows:
If you trade cryptocurrency with a profit-making intention, this will result in any profits being assessed as ordinary income.
Cryptocurrency is an asset for capital gains tax (CGT) purposes.
Cryptocurrency held for 12 months or more may access the 50% CGT discount (assuming you are not trading in cryptocurrency).
Transacting with cryptocurrency is akin to a barter arrangement, with similar tax consequences.
When cryptocurrency is exchanged for the sale of goods or services, GST will apply on that cryptocurrency. Conversely, the buying, selling or using of cryptocurrency as a method of payment is not subject to GST (assuming no business is being carried on).
To avoid paying tax on any increases in the value of cryptocurrency, it should only be purchased to acquire goods or services for private use. If the original purchase cost of the cryptocurrency was less than $10,000, any capital gain or loss is non-taxable. SMSF's are allowed to invest in cryptocurrency but this must fit in with the fund's investment strategy. Trustees may struggle to have cryptocurrency registered in the fund's name which is likely to breach the SIS Act separation of ownership rules.
