4 Things you need to Know about Bitcoin and the Tax Man
With the meteoric rise in value of digital currencies such as Ripple, Litecoin and the widely popular Bitcoin, I decided to put together an article to address some often overlooked tax issues associated with crypto currency trading or investing.
So, what are the tax implications of purchasing or selling digital currencies?
Like anything tax law related, there are no straight answers here. The tax implications will depend on how you use your digital currency. Let's now explore what you need to know based how you use it.
1 Know your digital currency
There are many types of digital currencies, and each has it’s own unique characteristics. Some are a medium of exchange while others give rights to profits. It is important to know this about your crypto currency in order to ascertain how trading with it interacts with Australian tax laws.
The ATO recognises this in its general guidance on digital currencies, and therefore has only issued guidance on Bitcoin specifically. The guidance notes from the ATO advise that transacting with Bitcoin is similar in nature to a barter arrangement, with similar tax consequences. Meaning Bitcoin is not money or foreign currency, it is an input taxed supply for GST purposes and is an asset for capital gains tax (CGT) purposes.
2 Keeping it personal
If you buy goods for personal use and pay for them with Bitcoin, there will be no income tax or GST implications. Further, any loss or gains made on the disposal of the Bitcoin will be disregarded as a personal use asset (provided the Bitcoin cost AUD $10,000 or less).
3 Business bartering
If you use Bitcoin to purchase business items or in exchange for items you sell, then you need to record the income or expenses based on the arms length value of the goods or services traded (including GST if applicable).
4 Investors beware
Bitcoin that is held for investment purposes may attract capital gains tax as it is an asset for CGT purposes. Additionally, the tax act considers any activity that has a profit-making purpose will render any gains as assessable income. These two areas are where many people will need to be aware so that they are not caught up in tax evading circumstances.
This is particularly important now as the ATO has announced a new task force to tackle crypto currency tax evasion. Crypto currency investors may in the future find themselves subject to scrutiny by the ATO. The best way to manage this is by maintaining as much documentation on ALL transactions involving their digital currency. Records such as date, the AUD$ value of the transaction, what the transaction was for (think of invoices or receipts) and who the other party was or Bitcoin address will help to ensure that you are able to correctly substantiate any transaction should the ATO come calling.
Disclaimer: This article is for general information only and cannot be relied upon as specific tax advice.