The ATO has released some additional (but brief) guidance on some of the key issues that tax practitioners should consider when clients are engaged in cryptocurrency investment or mining activities.
The ATO makes the comment that most people hold cryptocurrency as an investment which they hope grows in value over time to give them capital gains. It isn’t entirely clear how the ATO has reached that view and we would always recommend looking carefully at each client’s circumstances to determine whether they hold cryptocurrency on capital or revenue account.
When it comes to cryptocurrency that is held on capital account some of the main points raised by the ATO in this area include:
- A CGT event occurs when disposing of cryptocurrency. This can include selling cryptocurrency for a fiat currency (e.g., $AUD), exchanging one cryptocurrency for another, gifting it, trading it or using it to pay for goods or services.
- Each cryptocurrency is a separate asset for CGT purposes. When a client disposes of one cryptocurrency to acquire another, they are disposing of one CGT asset and acquiring another CGT asset.
- On the other hand, transferring cryptocurrency from one wallet to another, it is not considered a CGT disposal if ownership of the coin is maintained.
- Things like brokerage fees, transfer costs, platform costs, borrowing expenses, interest on loans and legal fees can be included in the cost base of the cryptocurrency.
- The longer someone holds cryptocurrency the less likely it will be classified as a personal use asset.
- Record keeping is extremely important – clients need receipts and details of the type of coin, purchase price, date and time of transactions in Australian dollars, records for any exchanges, their digital wallet and keys, and what they paid in commissions or brokerage fees, and records of tax agent, accountant and legal costs.
While the ATO considers that it is generally less likely that a client’s cryptocurrency activities will amount to a business, it is possible for clients to be conducting cryptocurrency trading and/or mining businesses. In determining whether a business is carried on it is necessary to consider:
- The nature and purpose of their activities;
- The repetition, volume and regularity of their activities;
- Whether they have a business plan; and
- Whether their activities are organised in a business-like way.
Where a client carries on a cryptocurrency business, the trading stock rules apply rather than the CGT rules. This would mean that the cost of acquiring cryptocurrency held as trading stock is deductible, the full amounts received on sale are assessable as ordinary income (not as a capital gain) and movements in the closing value of stock need to be recognised for income tax purposes.