By Richard Cooper, Business Advisory Partner, Findex.
Cryptocurrencies such as Bitcoin or Ethereum have taken the world by storm. Even people who have put small amounts of money into the market early on have made significant gains. Some have even become millionaires, such as American-based brothers James and Tommy who shot to millionaire status almost overnight after investing a few hundred dollars in the market.
As the currency continues to boom in popularity, particularly with young Australians, many do not understand the real-life implications their investments can have, including impacts on their tax return.
As a digital currency, people may believe rules do not apply. This was perhaps the case in the very early days of crypto emerging in the market, but as the currency becomes more established and mainstream, the regulators and Australian Tax Office (ATO) are playing catch up and paying close attention.
As with any investment, in traditional currencies or otherwise, people need to be aware of what they’re getting themselves into with their hard-earned cash to make smart decisions along the way.
Here are our Top 5 tax-time tips for investing in crypto to avoid getting burned.
Keep a record of your transactions
Record keeping is crucial. Depending on the type of transaction in crypto, there may be different tax implications. All transactions must be treated separately and appropriately from a tax point of view so it’s important you keep a record of everything.
It is your responsibility to declare gains and losses
While the ATO is now collecting bulk records from cryptocurrency designated service providers, including purchase and sale information, it is ultimately your responsibility to declare gains and losses. Otherwise, you can expect a letter from the ATO asking why you haven’t. If you are concerned about incorrect information, you will be given 28 days to clarify any data that has been obtained but you should contact the ATO directly if you need support with this process.
Understanding capital gains and losses
A common mistake investors make is that capital gains or losses apply when they ‘cash out’ on their crypto. However, this isn’t the case. Capital gains or losses apply more broadly, including on the Sale or Swap/exchange of crypto currencies. For individuals and small businesses (excluding companies), generally a 50 per cent discount will apply where a gain is made, and the cryptocurrency has been owned for over 12 months. A loss will also be incurred where cryptos are lost through being hacked or accidently sent to an incorrect crypto address where they cannot be recovered so taking simple security steps when trading is a must.
Personal use assets are not subject to tax
Where an online retailer offers a product whereby the customer can use crypto currency as payment, any gain on the crypto currency used to purchase the product may be defined as personal use assets. This means it is therefore not subject to capital gains tax. However, this isn’t without condition. Two criteria must be met to avoid capital gains tax impacts. Firstly, that the cryptocurrency is used to purchase goods or services. Secondly, only capital gains from personal assets under $10,000 are excluded.
Use this time to plan ahead for next year
For taxpayers who will continue with crypto currencies in the next financial year, then there is merit in looking at whether there are any benefits in restructuring how they invest in the future. Taking the time to get your ducks in a row now, could hugely benefit you in years to come.
While all reasonable care is taken in the preparation of this article, to the extent allowed by legislation Findex (Aust) Pty Ltd ABN 84 006 466 351 (Findex) accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex assumes no obligation to update this material after it has been issued. You should seek professional advice before acting on any material.