Bitcoin is off to the moon and many people are sitting on some handsome profits. How do I know this? Well just three months ago I wrote on Acquiring Bitcoin and on that day the price of Bitcoin was $2,000. This week the price has broken $5,000 for the first time. Amazing! I wonder what the price is now at the time you are reading this?
So you may be curious to know how profits on bitcoin are taxed in Australia. As usual with tax law, the answer is… it depends. It depends on why you acquired it and how you used it. Below I’m going to explain some of the basics on how bitcoin is taxed, which is for general information purposes only. I highly recommend you seek tax advice from a tax professional to ascertain the correct tax treatment for your circumstances.
Potential taxation scenario 1 – profit fully taxable
Where a person acquires bitcoin with the intention of speculating that the price will increase, then any profit made may be fully taxable. For example, say you acquired 5 bitcoin three months ago for $2,000 each ($10,000 in total). You decided to acquire the bitcoin because you had seen that bitcoin had gone up substantially in the past, and so you were hoping that by buying bitcoin you could later sell it soon for a healthy profit. You now sell the bitcoin for $5,000 each ($25,000 in total). Your profit is $15,000. Tax is assessed on the whole $15,000 profit. Accordingly, if your other income (e.g. salary) is $70,000, then tax on the $15,000 profit is approximately $5,175 (34.5%).
Profits from the sale of bitcoin are fully taxable as explained above where you are undertaking a “profit-making” plan or business. The most likely scenario for this to apply is where you acquire bitcoin with the sole intention of making a profit by selling the bitcoin in the short to medium term (days, weeks or a few months). It can however still apply even if you sell after a year or more of acquiring the bitcoin. Additionally, the more money you invest, the more likely it is you are executing a profit-making undertaking.
Potential taxation scenario 2 – tax on 50% of profit
If you have acquired bitcoin for a purpose other than a profit-making undertaking or business, then any profit made may qualify for the capital gains tax 50% discount. What this would mean is that only 50% of the profit is taxed.
Let’s say you purchased bitcoin about 13 months ago. The price was $700. You bought 1 bitcoin because you heard about it on the Internet and wanted to get some for yourself to see how it worked and also hoping the price appreciates so you can sell later for a profit. You have now sold the bitcoin for $5,000 and made a profit of $4,300. Since you have owned the bitcoin for more than 12 months, and this is not a profit-making undertaking or business, you are only taxed on 50% of the profit. If your other income is $80,000, then tax on $2,150 (50% of $4,300) is approximately $740 (34.5%).
It is important to note that had the above bitcoin been owned for less than 12 months, then 100% of the profit would have been taxed. The scenario above is not likely to be a profit-making undertaking because the amount invested is small and although the person was hoping the price increased, this was not the only reason they purchased the bitcoin.
Potential taxation scenario 3 – profit is tax-free
In limited circumstances profit on the disposal of bitcoin can be tax-free. For tax-free treatment to apply, you must satisfy the “personal use” conditions. Tax law states:
A CGT asset is a “personal use asset” if it is used or kept mainly for the personal use or enjoyment of:
- The taxpayers, or
- An associate of the taxpayer,
And is not a collectable or land, a stratum unit or a building.
A capital gain you make from a “personal use asset”, or part of the asset, is disregarded if the first element of the asset’s cost base, or the first element of its cost if it is a depreciating asset, is $10,000 or less.
Applying the personal use conditions requires a close examination of the facts and a technical understanding of the above law; an in-depth discussion on this is beyond the scope of this blog. I believe a number of bitcoin holders may qualify, but unfortunately expect a lot will inadvertently fail due to not being adequately aware of the personal use conditions. If you think you qualify, then you should be seeking tax advice to confirm, as Australia’s tax system puts the onus on taxpayers to report their tax liabilities, and failure to do accurately can result in heavy penalties and interest charges.
Other potential taxation scenarios
To limit the length of this article I have not specifically gone into scenarios where you acquire bitcoin by way of bitcoin mining or some other manner besides purchasing through an exchange. I will say that in these other scenarios, you may be taxed on 100% of your profits, 50% or it could be tax-free – once again, it depends on your personal circumstances.
Ultimately the tax treatment on your bitcoin profits depends on your personal circumstances. A failure to thoroughly examine these circumstances and apply them to tax law may result in payment of unnecessary tax or a risk of ATO audit for non-payment. If you are sitting on or have made profits from bitcoin, then give me a call on (08) 9427 5200 or submit an enquiry.
Note: Munro’s is based in Perth but we are capable of assisting any Australian with their tax compliance obligations no matter where they are.