23 September 2019
Cryptocurrencies are currencies that exist only digitally. Rather than one central regulating authority recording all transactions and managing the issue of units, cryptocurrencies use a decentralised ledger known as blockchain technology to prevent counterfeiting and fraudulent transactions.
Block-chain technology uses a series of encryption technique known as cryptography to chronologically record financial transactions in a manner that keeps various details of the transaction anonymous but still ensures past data of a transaction cannot be tampered with and as a result like traditional currencies, the same dollar is unable to be used twice at any one moment.
In recent years, cryptocurrencies have gained mainstream popularity as buyers seek alternatives to the current financial structure and turn to these decentralised digital payment systems. Well known cryptocurrencies such as Bitcoin and Ethereum are just two of over 1600 cryptocurrencies available. Despite the crash of the market in 2018 where the price of Bitcoin fell by 65% in the space of just a month, there is still a view among many that these encrypted digital currencies are the future of money.
The Australian Tax Office currently recognizes the disposal of cryptocurrency as any time cryptocurrency is exchanged for another cryptocurrency, converted to fiat currency (e.g. Australian dollars) used to obtain a good or a service or gifted. When cryptocurrency is disposed of, a Capital Gains Tax event occurs and as a result a capital gain is recorded if the capital proceeds from the disposal of the cryptocurrency are greater than its original cost base.
If an individual holds cryptocurrency as a personal use asset and therefore only plans on using the currency to purchase items for personal use or consumption, the ATO may disregard any capital gains or losses that arise. However, if cryptocurrency is acquired as an investment and disposed of, then the holder is not entitled to the personal use asset exemption. Fortunately, individuals that dispose of cryptocurrency held as an investment can use capital losses that occur to offset capital gains and are also entitled to the CGT discount on their capital gains if they hold the currency for 12 months or longer.
When Cryptocurrencies first gained popularity, the Australian Tax Office was underprepared and placed a large amount of trust in individuals to correctly declare any capital gains that arose from its disposal. Obviously, this was a major issue for the ATO and since early 2018 legislation has been in place to allow the ATO to use a compulsory 100-point identification check against Bitcoin investors. In addition to this ID check, the ATO has also begun to collect records on an ongoing basis from Australian cryptocurrency trading facilitators (known as Designated Service Providers). This data-matching program is assisting the ATO in identifying tax payers involved in cryptocurrency trading and ensuring they are declaring any capital gains that arise.
While these methods are proving to be effective for the ATO, cryptocurrency users in Australia are still required to keep records of their cryptocurrency transactions such as the date of purchase and disposal, the value of the currency at the time of the transaction and who the transaction was with.
Be mindful that because cryptocurrency is fairly new, the ATO is constantly updating legislation regarding the tax effects of its disposal.
Get in touch with the team at Shakespeare on 9321 2111 if you need assistance on how to declare your trading, or would like to discuss how this may apply to your individual circumstances.
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