Did you or do you currently hold cryptocurrencies? Did you sell any cryptocurrencies before finding out that the Australian Tax Office (ATO) would vigilantly tax cryptocurrency sales? Are you left scratching your head after reading the ATO’s guidance? If so, you are one of many Australians currently finding themselves in an uncertain tax situation.

The ATO provided that in general, income from cryptocurrency transactions will be subject to Capital Gains Tax (CGT). This means that income from these transactions will be taxed at your marginal tax rate but will provide an avenue to obtain some useful exemptions. 

However, the ATO may also find that you are carrying on a business or profit-making scheme (both of which are not considered in this article), in which case the CGT provisions and exemptions will not apply.

Accordingly, you should obtain appropriate legal advice and have an awareness of your potential taxation liabilities.

Capital Gains Tax

Under the Income Tax Assessment Act 1997 (Cth), profits (or losses) arising from the disposal of an asset may give rise to CGT consequences or tax concessions. A CGT asset is any kind of property or legal right and in Taxation Determination 2014/26 the Commissioner confirmed that cryptocurrencies satisfy this definition.

Therefore, selling a cryptocurrency will give rise to CGT event A1. Disposal does not refer solely to the converting of the currency back into Australian Dollars and will include selling one cryptocurrency for another. 

The capital proceeds of the disposal are the money or market value of any other property received; and the cost base is the original price paid for acquiring the cryptocurrency and any other costs related to the ownership of the cryptocurrency (for example, exchange/broker fees may form part of the cost base).

Benefits of CGT

Whilst this change spells bad news for investors who were under the impression that only conversion back into Australian currency was taxable, it’s not all doom and gloom.

For example, if the cryptocurrency was acquired as a capital asset to be held for long-term investment, then holding the CGT asset for more than 12 months yields a 50% tax concession.

Additionally, any capital losses (i.e., losses made on trades) can be offset against future gains.

Ultimately, it is recommended that taxpayers keep track of the time and date of any transactions made as this will be a critical factor in determining their applicable taxation liabilities and exemptions.

 Personal Use Asset Exemption

Purchases under $10,000 may be disregarded if the personal use asset exemption applies. The test with regards to the application of the personal use asset exemption is whether the cryptocurrency was purchased for the purpose of then acquiring items for personal use or consumption.

On this basis, if you purchased a cryptocurrency with the intended purpose of using it to purchase a common household appliance, music or clothes; and the purchase was less than $10,000, then the personal use asset exemption may apply.

The time-frame in which the cryptocurrency was held and subsequently disposed of may be evidence as to whether the personal use asset exemption will apply. For example, some Private Binding Rulings (PBRs) indicate that if the cryptocurrency was purchased with the intention of using it to purchase goods and services, however was subsequently held for a period of time and used when exchange rates were favourably higher, then the personal use asset exemption may not apply.

Additionally, other PBRs have revealed that early adopters of cryptocurrencies may plead the personal use exemption and be relieved of any tax liabilities on the basis that the cryptocurrency was acquired as part of a personal hobby and without the intention of making a profit or gain.

This is consistent with TD 2014/26 at paragraph 21 where the Taxation Commissioner noted that early adopters who mined bitcoin would satisfy the personal use exemption so long as they can prove that they did not have the intention of exchanging the bitcoin back into Australian currency for ‘favourable rates’ because at that time, the ability to develop a profit-making scheme or carry on a business in the area was minimal and fanciful at best.

However, the onus of proving the applicability of the personal use asset exemption lies with the taxpayer; and if the tax office chooses to audit the taxpayer; takes the contrary view; and is proven correct, then the taxpayer will be liable to pay an administrative penalty of an additional 25% on top of their tax liability in accordance with Part 4-25 of Schedule 1 of the Taxation Administration Act 1953 (Cth). 

For more information on cryptocurrency transactions and taxation or for general business law advice, please contact:

Paul Gray
Principal Lawyer
T  03 5225 5231
E  pgray@ha.legal

This article was written with the assistance of Alex Gulli, Graduate Lawyer