How will my crypto currency gains and losses be treated by the Australian Tax Office (ATO).
I have seen a lot of discussion about crypto currencies and tax in various blog posts on Steemit. Most of these have dealt with the American tax system, so in this article I hope to outline the implications of crypto currencies and tax as they are relevant to Australian citizens. I am attempting to write an article that is of use to those who want to declare their crypto earnings and pay the appropriate amount of tax. As such I won’t be suggesting any ways to “dodge” tax. There are any number of ways to try and avoid detection by the ATO and thus avoid tax. I will be steering clear of these issues. That said, I will suggest a number of ways that may enable you to legally minimise your tax bill.
Originally I had only intended to write a single post on this issue, but as I have been working on it, it has grown in size. I will instead spread it across three separate posts to attempt to keep each post manageable in size, and more reader friendly. This article will deal with some taxation basics as they relate to crypto currencies and the use of bitcoin as a medium of exchange, including the potential implications on using services like Living Room of Satoshi. In the next article I will cover taxation as it relates to investment gains and losses, and in the final article I will suggest some ways in which you may be able to legally minimise any debt you owe to the tax office.
My background to write this post
My professional occupation requires me to deal with tax regulations on an almost daily basis. I am registered with the Australian Tax Practitioners Board to give advice in relation to tax and investments. That said, I am not an accountant. Tax Law is extremely complicated, and your tax obligations depend almost entirely on your personal circumstances. For detailed tax advice you need to consult a registered tax accountant. The purpose of this blog is not to provide detailed tax advice to those that read it. It is merely intended to provide general knowledge to allow you to have a greater understanding of the tax consequences of investing in crypto currencies. By way of quality assurance, my wife also holds a Masters of Professional Accounting, and she has reviewed the contents of this post and agrees with the interpretations that it contains. Please note that she is also not a registered tax accountant, therefore I need to reiterate that for personal advice on your individual circumstances, you would need to consult with a registered accountant.
The ATO’s view of crypto currencies
There is a reasonable amount of information on the ATO website that deals with taxation and crypto currencies. The ATO documentation refers almost exclusively to bitcoin, however I have chosen to treat the terms of “bitcoin” and “crypto currency” interchangeably in relation to the way in which the ATO views these assets. In other words, where the ATO makes specific reference to bitcoin, you could insert any other type of crypto currency and the interpretation would be the same.
The link to the ATO’s guidance paper is shown here.
The ATO covers a number of different issues in relation to crypto currency investment, speculation and other areas. I will deal exclusively with two areas these being:
bitcoin as a personal use asset
bitcoin as an investment
The ATO also provides guidance for bitcoin miners, and for those who are using bitcoin in the course of carrying on a business. These topics are outside the scope of this article.
Bitcoin as a personal use asset
The term ‘personal use asset‘ is quite important in relation to Bitcoin. A personal use asset is, exactly as the title implies, an asset that you acquire for personal use. It is not an asset that you acquire with the expectation of making a of profit or loss. Things such as televisions, iPads, motor vehicles and personal computers would all be considered personal use assets. The ATO allows you to exclude the purchase and sale of personal use assets when calculating your taxable income. This is important because in certain specific circumstances the ATO will allow you to treat Bitcoin as a personal use asset, and therefore you will be exempt from taxation on Bitcoin in those circumstances.
The ATO guidance papers states
Where you use bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is $10,000 or less.
I have had tax discussions with a number of members of the crypto community, and some have indicated that they believe this to mean that provided you make purchases of less than $10,000, then the bitcoin or other crypto with which that purchase is made is exempt from taxation. I believe this to be a misinterpretation of this tax guidance. The easiest way to demonstrate this is to use an analogy.
Imagine I was to travel to Europe on vacation, and was to convert Australian dollars into British pounds prior to leaving on my holiday. If upon return from holidays I had not spent all of my money, I would be able to re-convert those British pounds into Australian dollars. If whilst I was on holidays, the value of the British pound had risen and I had made a gain on the exchange rate, then this gain is exempted by the tax office, and I’m not required to pay tax on. This is how to view personal use transactions in relation to crypto currencies. The key here is that I bought British pounds in order to use them for personal use, not with the expectation that I would make a profit on the exchange rate.
To be more specific, if you purchase bitcoin or other currencies purely for the purpose of using them as a medium of exchange to purchase goods and services, then you are able to disregard any gain or loss made on those purchases as a result of fluctuations in exchange rates. This is very distinct from purchasing bitcoin as an investment. The interpretation of the above guidance from the ATO has some interesting consequences. It is my opinion (and it is an opinion only) that if you purchased some bitcoin at some time in the past, as long as the total value of that purchase was below $10,000, AND you use that bitcoin exclusively for the purchase of goods and services then you are legally exempt from paying tax on these transactions.
This has some interesting implications if you have only made one or two transactions in crypto currency. You could conceivably have purchased $1,000 worth of bitcoin in 2010, which would now be worth many millions of dollars. Provided you spend this money purely for personal use, then your entire gain could potentially be tax exempt. Very few crypto investors would fall into this category however.
If the ATO forms the opinion that you have purchased crypto for investment purposes, then you will be subject to capital gains tax and the above exemption will not apply. As there is no specific line between a transaction under $10,000 purchased purely for personal use, and a transaction under $10,000 that has been purchased as an investment, the ATO will attempt to look at the pattern of behaviour in your crypto currency transactions.
What does pattern of behaviour mean?
If you, like me, have over time made numerous transactions, in multiple different currencies, then the pattern of behaviour would suggest that you are not purchasing the currency for personal use, but are purchasing it as an investment. This may seem a little bit fuzzy, but in reality, I think it’s quite clear. If the ATO believes that based on your pattern of behaviour, you are an investor then they will tax you as one, regardless of whether you claim to be one or otherwise. Conversely if you wish to be treated under the personal use exemption outlined above, you would need to be able to demonstrate from your pattern of behaviour, that you are not trading in crypto currency with the intention of making a profit. This sounds complicated, but if you consider your own situation you should be able to figure it out. I would suggest that you don’t try to be too cute in relation to the way that you frame these things. The ATO will assess you based on their opinion, and not your own, so I would encourage you to err on the side of caution.
Important points to consider
There are some other important points to consider in relation to attempting to claim Bitcoin is a personal use asset. The ATO guidance states:
..you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using bitcoin).
A strict interpretation of this would mean that you would need to physically acquire an asset in exchange for your bitcoin. I interpret this to mean you would need to have purchased that asset from a business that accepts bitcoin as a means of payment. I will illustrate with another example.
I recently saw a BMW drive past me in Brisbane with the number plate ‘BITCOIN.’ I suspect that the driver of the vehicle had been an early investor in bitcoin, had made a decent profit, had sold some of this bitcoin and splashed out on a fancy car. Assuming he met the other requirements for personal use, then if he had been out to convince the BMW dealership to accept bitcoin in lieu of Australian dollars as payment for his vehicle, then I believe he may be a claim the personal use exemption and be exempt from any tax on the profit he made from his initial bitcoin investment. I suspect, however, that what he actually did was sell bitcoin on a bitcoin exchange, turn it into Australian dollars, and then use those dollars to purchase the vehicle. This does not strictly fall into the definition as shown above and therefore this individual may be liable for capital gains tax on any profits that he made from his initial bitcoin investment.
My interpretation of the above tax office guidance is that you must have physically paid for something in crypto currency to be able to claim this exemption from tax. You must have actually used the crypto as a currency. Conversion into fiat and then purchasing goods and services, regardless of what they are, may not meet the criteria. This is an area where I emphasise that I’m not a registered tax accountant, and that therefore it would be wise to consult with one if you felt that this is an issue that may affect you.
I have given some considerable thought to the implications of the use of Living Room of Satoshi (LROS) in this regard. Technically when you use LROS, you are not actually paying for services with crypto, you are sending the crypto to an intermediary, who is converting it to dollars and then using those dollars to pay your bill. I will put my hand up on this one and state that I don’t know how this would be treated. I suspect that the tax office doesn’t know either because I doubt they have given it any consideration yet. This is one of the joys of operating in a newly emerging area of finance.
To summarise my assessment of the personal use tax exemption for Bitcoin and other crypto currencies I would suggest that:
The original purchase price of the crypto currency in question must have been less than $10,000. This could potentially involve several purchases up to the $10,000 limit.
The goods and services which you purchase with these funds must be paid for directly in crypto. As stated this is my opinion only, based on an interpretation of the ATO’s guidance, however I think if you took this approach you would be relatively safe.
You must not have a pattern of transactions that demonstrate that you are speculating or otherwise investing in crypto currencies. I think this is the point that will rule most of us out of using this exemption. If you are actively trading, as I am, then I think it would be very difficult to convince the ATO that you were buying the crypto for personal use only.
This is the first article in what is likely to be three covering the tax implications of purchasing crypto currency assets. In the next I will cover taxation as it relates to investment gains and losses, and in the final article I will suggest some ways in which you may be able to legally minimise any debt you owe to the tax office.
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The material contained in this document is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Opinions constitute our judgement at the time of issue and are subject to change.
Written with StackEdit.
Awesome post thanks heaps for this :)
Thanks mate. I’m glad you liked it.
Excellent post. Upvoted and resteemed.
Thanks mate!
As a new member and a non financial person trying to understand these things a bit better this was a great way to start with an Australian perspective. Thank you.
Thank you @bogglemcgee,
I try to make my more technical pieces as easy to read as possible. I'm glad you enjoyed it.
hey @aghunter
Your posts make me wish I had more steempower - they are worth much more than my upvote contributes! Super helpful info. Thanks!
Get outta here. Look at you! Reputation (35) already! I'd be get my head down and write some good posts or you'll catch me soon!
Haha - you're too kind... if you get stuck for ideas I've got plenty of questions for you!
Go on. Throw a couple of questions my way. I'll see if I can come up with a decent post in response.
I've been researching to try and understand how to start a crypto portfolio - but am getting confused by the info that is out there. I'm still not 100% sure about the pros and cons of paper / hardware / online wallets - especially if I want to start with a very small budget, and possibly get ICO's.
How do I navigate channels from fiat to crypto to ICO's without loosing most of it in fees?
How do I manage a cypto portfolio? I'm guessing there is a lot of software out there for this?
Is there much difference between investing in crypto as an individual vs as a business?
I have more questions but I will try and do some more research before I completely bombard you. At this stage I am pretty much investing to learn - because I need to learn for work. ...but if I can buy a small island when I retire that would be nice too! ;)
Hey @aghunter. Super detailed post mate, I think it was the right call to split it into a few parts.
Like you suggested, the large majority of us that are actively trading will not be exempt, particularly if our holdings exceed over $10,000. I think with the interest crypto is getting from institutional investors, those active in the game will almost definitely have to register their addresses and link them to a personal profile. I don't think the government will be able to cover all crypto, but the big crypto coins will probably be covered. While there will be some resistance, I think the "smart" investors may even push for this as it legimatizes the crypto as a medium of exchange/asset amd further pumps up the price.
With these addresses it would not be hard to monitor the deposits and withdrawals to see exactly what activity is going on... and for the ATO to pass judgement on whether it was for personal use or brought as an investment.
While no one likes taxes, the upside for those that have been hodling is in Australia we will be able to take advantage of the capital gain tax concession if we hold for more than a year, and any transaction costs involved with the sale of crypto for fiat should also be tax deductible... I think :P
Really keen to see the rest of these posts. While I have very little skin in the game, it still good to know.
@strongerbeings
@strongerbeings
I couldn't agree more with this. I think the natural extension of the transparency of the blockchain is that eventually it will enable monitoring of individual wallet addresses. That said, how long it takes for an organisation like the ATO to catch up with the technology required to actually enable this to happen is another question altogether.
I do think it will be a good thing longer term though if it happens. As you say, it will lend legitimacy to the entire system, and with legitimacy will come greater adoption, both as mediums of exchange and as investments.
Dude!! This is amazing!!!
One of the reasons I really like crypto is the 'currency without borders ' aspect. Eventually we'll move back to Australia. Transferring money across from Australia was a slow, heavily fee'd process, with incredible restrictions. We bought a house in the US but our deposit money was in Australia. It took me a week and heaps of phone calls to find an adequate process.. and even then it took 5 seperate transactions as banks have daily limits.
I think we'll rent out this place when we leave, so crypto will be our bridging finances when we move back...
I have no idea how this will work tax-wise since investments have all been made from mny US income, but we have an excellent Australian accountant who will no doubt be excited to tackle it.
I have a client like you. Shes and Aussie who works for the UN, earns all her cash in USD, but still pays Australian taxes. She's a nightmare. Lucky she's super hot :)
Great info
Thanks
really interesting, perhaps you could take a look at the tax implictations of using Crypto as a loan vehicle for those who don't conventionally trade in the sense that they purchase but never sell. So if you buy a bitcoin, then years later it's worth a ton of money but you never sell it and instead just draw a loan against it using it as equity for the loan. Presumably there's no tax against loans because loans aren't income, and there's no tax if you don't sell an asset, and tax is only due when you do sell it?
Have you heard of the cryptocurrency lending platform salt? It does exactly this, allowing you to use your crypto as collateral for a loan in fiat currency.
Yeah, funnily enough it did come up on a video about ten interesting altcoins that I watched a couple of week ago but the guy was talking about their ICO and why he didn't put in was he was concerned about the regulatory aspects of issuing loans. I'd forgotten about it until today. It is a really good concept, I hope it takes off because it would be useful
I looked at it but initially the interest rates they were charging and some other things put me off. Having thought about it some more, if they can get the business model right then once the market settles down over the next few years, then potentially the lending rates and other stuff comes down to make it a more viable proposition. I might need to look into it again.
Hi @angusg
I think your concept is essentially sound. As you mentioned before, its the way a lot of property investors run their portfolios. You are 100% correct that if you don't ever sell, then you don't ever crystalise the gain so there is no tax.
The loan side is also an evolving concept. Again I think you are onto something here. There are a couple of projects exploring this as we speak. The problem at the moment is the volatility in the market. Because the volatility of crypto assets is so high, the interest rates and collateral requirements to get a loan backed by crypto make it unworkable (IMO). I read something the other day that said you currently have to provide 2 BTC as collateral to get a loan for 1 BTC worth of fiat. As the market matures and the prices get more stable some of these issues will go away.
Cool, I guess that's not to bad tho for HODL'rs, if you never intend to sell your Crypto asset but just want to draw down a small loan I could see it being viable for people. For example last year Bitcoin rose 700 percent, Litecoin rose 2,950 percent and Verge I think rose a lot faster. So say you bought $1,000 of crypto when a coin was trading around 1/10 of a cent then it went up to $1 or $2 you would probably have a profit that is way above what your living costs might be.
In a scenario like that I see it as pretty useful that you wouldn't necessarily want to sell your asset or even get a loan for most of it, especially if it was still an asset that was rising tremendously in value. However say you'd made a million dollars out of it but just wanted to draw down living costs of around $40,000 even if the lender's requirement was 2:1, you could just stake the 2:1 that you needed for the draw-down and still keep the balance of your asset under private control in a wallet with your own keys.
I'm starting to see it as a very viable way to live. Of course assuming that Crypto keeps rising and that the bankrupt US dollar doesn't force the US government into a phase of regulation and then issuance of their own Fiat crypto dollar. Apparently if there was a run on the US banks today there isn't enough physical cash to cover even a tiny 1% fraction of withdrawals and Governments will do the darkest sxxx possible when it comes down to it if their survival is impacted. That's something that could realistically be on the Horizon because there are so many more pensioners living longer in all the Western countries and declining birth rates and declining rates of taxpayers in the productive bracket to fund everyone else.
My bug out plan for this year is to make a squillion dollars in Crypto and then at least just buy a modest house somewhere and set aside a couple of years of canned goods. When SHTF and everything collapses and the power goes out at least I'll lose my squillion but still have a place that I can board up and fight off zombies, and I from what I hear when the lights go out, cans of Tuna will be the new gold standard.
have you been watching doomsday preppers? If not you shoulf. You'd love it!!!
Thank you so much for this article. It is a headache visualizing the conversation between myself and a tax accountant about this issue, haha.
At least now I know there's two types of uses for crypto for the ATO
Yeah me too. im going to hit my accountant with these articles and tell him to review them because he's going to need to know this stuff when he does my taxes this year :)
Fantastic article. Are there different implications (or undocumented implications) for using something like a debit card that debits a crypto-portfolio? (Otherwise, safe way, only spend 50% of your cashed out gains, lest the monster of CGT come out) :P
Hey @holoz0r
Thanks for the support. I put a lot of work into this one so its nice to be getting some positive feedback. Ill be honest and say Im not sure in relation to the debit crypto card question. My assessment of the LROS piece could also be wrong. I am going to speak with my accountant about it with week. The next article is going to talk about consistency in the way you approach your calculations/record keeping. There isn't any detailed guidance around things like LROS/debit cards because they are so new that they never had to be dealt with before. The tech is moving so fast that the regulations wont keep up anyway. The best you can do is take a "reasonable" approach to how you account for it, and apply the same approach consistently. I think if you can demonstrate that you tried to be reasonable and didn't try to dodgy anything then that should keep you out of trouble.
These are wise words though. The worst case scenario is to get stung with a big CGT bill and not have the assets to pay it. You wouldn't be the first person to be bankrupted by a tax debt!
Very interesting article.
Worth the resteem and upvote. you have put the hard yards in!
Tax is a beast to research and I applaud you mate.
@jamiebu
Thanks mate. I appreciate the appreciation :)
I will gladly pay $1 million dollars in profit taxes!
That means that I made many many many millions more than the taxes!
@jackmiller
That's one thing I think a lot of people miss. A tax problem is a good problem to have as it means you've made money. The easiest way to avoid paying tax is not to make any money ;)
It becomes a problem to those who try to avoid taxes in illegitimate ways and break the laws of the state.
In fact, it becomes a problem for anyone who willingly and knowingly avoids paying their taxes, no matter what their personal "opinions" may be.
Simple as that. Even if most people don't like paying taxes, it is what it is.
The truth isn't always what we want to hear, that is another major problem!
PS. Excellent read dude.
Thank you for this interesting post. Can you tell me how the ATO looks at Steemit rewards? Are they considered income?
Hi @orenshani7
It depends on your personal circumstances. I think (and I emphasis that this is opinion not fact) that in most cases the answer is no. It would be classified as a hobby (unless you were a professional blogger or journalist etc). Income produced from a hobby is generally exempt, but I believe its only up to a certain limit. Having thought it about some more after some of the comments I have received, this topic will probably end up being a post in itself, as it will get quite complicated.
this is brilliant! thank you @grazz for pointing me to this article.
@aghunter I was cheering for a while there with the whole personal use thing then you said I had to use crypto. my heart dropped.
we're waiting for our accountant to come back from holidays to get advice. cross fingers it's not too bad.
if my Steemit earnings are assigned as an income and I don't work, making this now my "work" would I fall under the exempt amount? or because I have an abn would I need to do my bas?
sigh
can't wait for the rest of the series. thank you both for taking the time and effort to write this.
Hi @bearone
Thanks for the compliment.
I think your question is partially answered above in my response to @orenshani7. Once you introduce ABN's and the concept of running a business into the mix, it gets really complicated. The ATO guidance talks about "running a business" but it seems to refer more to "running a business" in an investment sense rather than running a business in a traditional sense, where you produce something and get paid for it. I have to admit that I am stretching my knowledge a little at this point so cant provide a really confident opinion one way or another. I would be very interested to hear your accountants thoughts thought once you have spoken to them. A lot of this is down to interpretation so different people will have different ways to interpret it. In the absence of firm guidance from the ATO I think the best bet at this stage is to apply the "reasonable person test" as I mentioned to @holor0z in response to his comment.
happy with this!
Great post and it was greatly appreciated!
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Thanks for the time you put into writing this article. I've been wondering about how cryptos are going to be treated at tax time and this is one of the first Aussie posts I've seen.
It will be interesting to see how this unfolds in the next couple of years as the new laws are written and tested. There will probably end up being a blockchain based dap to keep track of trades throughout the year and provide a report to the ATO. It could automatically calculate an debit to be applied to the account, which I suppose would be updated every 3 months or 1 year.
Great post and very informative thanks for sharing. I have been doing a bit of research on this subject myself. I am curious on what your thoughts are on earning SBD and saving them would be classed as income subjected to taxation, or as savings not subjected to taxation? Then we have steem power, would this be treated as owning shares? and how would a capital gain be calculated on it's sale? cheers mate.
An enlightening post. Im gkad that I took the time to read it a couple of times. Ill resteem it so more Aussies can get the information.
How many taxes on bitcoin is Australia and please tell me bro
Very informative post thankyou.
Thanks for explaining this. Is this a recent change? When is the CGT law o effect, and will it be retroactive?