A. What is Cryptocurrency?
- A new electronic payment system – ‘virtual currency’ provides an alternative cash system. 2 parties can directly transact without need of 3rd party (bank). It can be managed by network of computer users and is not tied to any country.
- Acquiring Cryptocurrency – Cryptocurrency can be bought or sold through a Cryptocurrency ‘exchange’ by using different currencies.
- Digital wallets – Cryptocurrency is stored in digital wallet which has public addresses and PIN number.
- Cryptocurrencys can be used as an exchange which is similar to money. For example, customers can use Cryptocurrency to buy a meal in a restaurant that accepts Cryptocurrency.
- Price of Cryptocurrencys is unpredictable and volatile and is determined by supply and demand.
B. Tax treatment of Cryptocurrency on key scenarios
- Taxpayer sells Cryptocurrencys held as trading stock
- Cost of buying Cryptocurrency: is deductible in tax calculation. Adjustment must be made at year-end. If value of opening stock exceeds closing stock, the excess is assessable, but, if value of opening stock is less than closing stock, then the difference is deductible.
- Proceeds from sale of Cryptocurrency: is assessable as ordinary income. Disposal of Cryptocurrency will not result in a CGT liability.
- The purchase and selling costs of Cryptocurrency are deductible in the year they incurred (e.g. brokerage fees)
- A Cryptocurrency trader would generally be entitled to a deduction for following expenses: Interest, computer, software costs (i.e. annual licence fees), and running and occupancy expenses (i.e. mortgage costs and rates)
- No GST liability arises on the disposal.
- Business taxpayer accepts Cryptocurrency as payment
- The fair market value of Cryptocurrencys, in AUD, must be included in the assessable income of taxpayer as business proceeds
- From the time Cryptocurrency is received as payment to the time Cryptocurrency is disposed, some further tax consequences could arise which depend on whether the Cryptocurrency was later held as trading stock, or investment purpose, etc.
- If a taxpayer accepts Cryptocurrency as payment for taxable supply, the business is required to remit 1/11th of the amount as GST to the ATO. The amount of GST must be reported on activity statemen as an amount of money in AUD.
- Business taxpayer uses Cryptocurrency to make acquisitions
- The business is entitled to claim a deduction based on the fair market value of the item acquired (in AUD)
- A GST-registered business that involved Cryptocurrency denominated supplies, is able to claim ITCs for GST included the price of its acquisitions
- Taxpayer sells Cryptocurrency held for investment purposes
- Disposal of Cryptocurrency held for investment purposes (i.e. a gain is not assessed as income on revenue account) could be advantageous because of potential availability of 50% CGT discount
- Capital gain on disposal will arise if capital proceeds from disposal of Cryptocurrency exceed its cost base (and a capital loss arises if the reduced cost base exceeds capital proceeds)
- Interest expense incurred on funds borrowed to acquire Cryptocurrency for investment purpose is not deductible
- No GST liability arises on the disposal
- Taxpayer uses Cryptocurrency to acquire personal items
- Any capital gain arising on disposal is disregarded if the Cryptocurrency was held as a personal use asset and the first element of its cost base is $10,000 or less.
- No GST liability arises on the disposal
- Cryptocurrency sold as part of isolated profit-making transaction
- The net profit can still be taxed as ordinary income of transaction constitutes an isolated transaction.
- Any expenditures associated with the transaction are quarantined and are not deductible but are taken into account as part of net profit
- The transaction is also dealt with under CGT regime. There is an ‘anti-overlap provision’ that ensures the same amount is not taxed twice
- No GST liability arises on the disposal
To be continued…