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What are Australian tax issues for cryptocurrency investors?

The content in this article is provided for general information purposes and is not tax, legal, investment or other professional advice. Readers should seek appropriate professional advice prior to making any decision.

Alright, so you’re into cryptocurrency investing, or about to get started. Let’s look into the income tax issues.

Firstly, are you an investor or are you a trader? You’re an investor if you purchase cryptocurrency as a long term investment. What do we mean by that? Well, we mean if your intention at the time of acquiring the cryptocurrency is to hold it for a long time (many months or years) and as a result hope to gain from price appreciation, then you’re an investor. This is different to a trader, who will generally buy and sell cryptocurrency in a matter of hours or days with the intention to profit from short-term price fluctuations.

For tax purposes, by being classified as an investor, this means you are subject to the capital gains tax rules. So, what does that actually mean?

Well, it means if you sell cryptocurrency which you have owned for less than a year, then gains are 100% tax assessable. But what if I owned the cryptocurrency for more than a year? We’ve got some great news for you – it means you are entitled to the “CGT discount”, which typically means 50% of the gain is taxable and the other 50% is tax-free! There are some conditions on this, so you will need to consult an accountant to check eligibility.

But I made a loss? Damn that sucks! Losses are not immediately tax deductible against income, such as your salary. Instead, losses offset investment gains. Losses can offset gains made on cryptocurrency investments, share investments and even property investments. If you don’t have any investment gains for the tax year, then the loss is carried forward to the next year and the year after continuously until you have an investment gain to offset the loss.

Let’s run through an example to help explain all this.

Mike heard about bitcoin in January 2016 when one bitcoin was worth $500. Mike purchased five bitcoins because he really liked the sound of this emergent technology and thought it might appreciate in value over many years. In September 2017 Mike decided to buy two more bitcoins which cost him $5,000 each. Then in January 2018 Mike bought one more bitcoin for $20,000. In March 2018 Mike sold his eight bitcoin for $13,000 each because he wanted to use the proceeds to purchase a home.

When Mike sells his eight bitcoin, we look back and realise these are from three separate purchases. So, there are three different calculations to make:

  1. January 2016 bitcoins: The five bitcoins purchased in January 2016 cost $2,500 in total. These five bitcoins were sold in March 2018 for $65,000. That’s a gain of $62,500.
  2. September 2017 bitcoins: These two bitcoins were purchased at a cost of $10,000 in total. The sale resulted in $26,000. That’s a gain of $16,000.
  3. January 2018 bitcoin: Upon selling this bitcoin, Mike makes a loss of $7,000 because he received $13,000 but paid $20,000 for the bitcoin.

For tax purposes, we offset the $7,000 loss against the gains. We offset it against the gain made on the September 2017 bitcoins, because these were held for less than a year. Consequently, this nets out to a gain of $9,000. This amount is 100% tax assessable.

Now, the $62,500 gain made on the January 2016 bitcoins is eligible for the CGT discount because Mike is an individual and has held the bitcoins for more than 12 months. This means that $31,250 is tax assessable and $31,250 is tax-free.

Above is a vanilla example of a cryptocurrency investor and real world cases are seldom this black and white. For instance, a lot of people have more activity in cryptocurrency investing and the line between investor and trader is not so clear. That’s one of the reasons why you’ll need to consult a specialist cryptocurrency tax accountant to ensure you lodge tax returns correctly.

Also, if Mike had spoken with his accountant before making the investments, he may have chosen to purchase the cryptocurrency in a trust, a self-managed superannuation fund, or jointly with his wife; the end result potentially saving thousands in tax. This is why it is so important to speak with an accountant who understands cryptocurrency early on, rather than after the event.

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