Bitcoin trading is new. What happens with Bitcoin and your tax return?
ATO Provides guidance on Cryptocurrencies
Bitcoin is a global digital currency that was created to provide an alternative, online payment system that operates independently of a central bank. Bitcoins can be mined but are most commonly acquired through a broker or bitcoin exchange.
The cryptocurrency can be traded for profit, used in exchange for goods and services or held for investment purposes.
The ATO has released a suite of guidance regarding the tax treatment of cryptocurrencies, with a specific focus on bitcoin. The tax implications of transactions involving bitcoin will depend on the circumstances surrounding those transactions.
We will explore some of the taxation consequences that should be considered before purchasing cryptocurrency.
1. Bitcoin held for the purpose of sale or exchange in the ordinary course of a business
If a taxpayer holds bitcoin for the purposes of sale or exchange in the ordinary course of business, the bitcoin is considered to be trading stock, and must be accounted for as such. In this case the taxpayer is known as a bitcoin trader, similar to a share trader (but not an investor or speculator). Therefore the trading stock rules apply where the proceeds on sale of bitcoin are assessable as ordinary income. Purchase and selling costs of bitcoin held as trading stock are deductible and there are no capital gains tax implications in this scenario.
2. Bitcoin accepted as payment for business sales or used to make business acquisitions
Businesses might decide to use bitcoin as a currency (like cash) by accepting and/or using bitcoin as payment for goods and services. The ATO requires sales proceeds to be reported at the fair market value of the bitcoin in AUD and deductions to be claimed at the fair market value of the item acquired. The GST rules would apply to these transactions as usual, if the business is GST registered. This would not only increase compliance costs but also, further taxation consequences may arise when the bitcoin is later disposed.
3. Bitcoin held for investment purposes
A common reason for individuals to acquire bitcoin is for long-term investment. The disposal of bitcoin held for investment purposes attracts capital gains tax (CGT) consequences and potential access to the 50% CGT discount. A capital gain on disposal will arise if the capital proceeds for the bitcoin exceed the cost base. It’s important to note that mining labour cannot be included in the cost base when the bitcoins have been mined by the taxpayer. The 50% general CGT discount applies when the bitcoin has been held for at least 12 months.
4. Bitcoin held for the purpose of using it to acquire items for personal use
Taxpayers may acquire bitcoin without any investment or profit incentive. If the bitcoin is held as a personal use asset and the cost base is less than $10,000, then any capital gain arising on disposal will be disregarded. The ATO notes that bitcoin may be a personal use asset if it is kept and used mainly to purchase items for personal use or consumption. The ATO will also take into account when and how the bitcoin is acquired as well as the amount involved.
5. Bitcoin committed to an isolated profit-making transaction
An isolated transaction involving the acquisition and sale of bitcoin can still be taxed as ordinary income, even if the transaction is not carried out as part of the business. If a taxpayer acquires bitcoin with the purpose of profiting from it upon a commercial transfer, a gain made on its disposal will generally be taxable income as an isolated profit-making transaction. The ATO will consider various factors to determine whether an isolated bitcoin transaction may be a ‘commercial transaction’. Net profit incurred from an isolated transaction is taxed as both ordinary income and capital gain. However, there is an anti-overlap provision that ensures the same amount is not taxed twice.
Frequently Asked Questions
Can the ATO track bitcoin transactions?
Bitcoin transactions are recorded and made public but these transactions are identified only with an electronic address. This creates an initial impression that bitcoin transactions are completely anonymous and undetectable by the ATO. It is important to be aware that public addresses can be linked to a particular taxpayer through a third party if the ATO decided to investigate a bitcoin transaction.
Is bitcoin treated as foreign currency for income tax purposes?
The ATO does not consider bitcoin to be foreign or domestic currency. Therefore the foreign exchange rules do not apply to the purchase or sale of bitcoin. The foreign exchange rules would apply as usual if foreign currency was used to purchase bitcoin.
Is bitcoin mining treated as a hobby or business?
There are various factors to consider whether a miner is carrying on a business of mining bitcoin or simply mining as a hobby. These include intention to make profit and/or engage trade, magnitude of transactions and amounts, and time spent on mining activities. Basically, the taxpayer is carrying on a bitcoin mining business when they exhibit business-like behaviour.
What are the record keeping requirements for bitcoin transactions?
It is recommended that taxpayers firstly document their intentions at the time of acquiring bitcoins. Understanding a taxpayer’s intention in acquiring bitcoins is the first issue that requires consideration in determining the tax implications that follow.
The general record-keeping rules apply to bitcoin transactions but specific records to maintain include:
- The date of every bitcoin transaction
- The value of the cryptocurrency in AUD at the time of the transaction
- Details of the transaction such as the recipient, goods/services exchanged etc.
Are the CGT Small Business Concessions available for bitcoin transactions?
Unfortunately, the disposal of bitcoins in any scenario does not qualify for small business concessions. Capital gains that arise from the disposal of bitcoins held for long-term do not qualify because they were held for investment purposes rather than derived from business activities. Small businesses involved in bitcoin trading do not qualify either because the disposal of bitcoins is treated as assessable income, as opposed to a capital gain.