Do I have to pay tax on cryptocurrency in Australia?

Compared to other forms of ‘money’, cryptocurrency is the new kid on the block and like any new kid, everyone is keeping a close eye on how things are going. Not to mention, recent stats indicate one in six (around 17 percent) Australians currently own some form of cryptocurrency. 

Additionally, recent YouGov research tells us four million Aussies are likely to buy digital currency within the next 12 months. 

Looks like the new kid is here to stay. 

So, if you’re considering buying or trading in the likes of Bitcoin, Ethereum etc and want to know more about how cryptocurrency and tax work in Australia, we’ve got you covered.

What is cryptocurrency?

Cryptocurrency, or ‘crypto’, is a type of digital money. It’s just like dollars, euros or pounds but not in a physical form. Used online in exchange for goods and services, cryptocurrency is secured by cryptography, which is ‘protecting information and communications through the use of codes’. This is actually how it got its name and its cryptography makes it almost impossible to counterfeit. 

What does this mean for you? It means cryptocurrency is very secure. 

Some companies have even created their own cryptocurrency, called tokens. Think of it like walking into a gaming arcade or casino. To play, you need to exchange real cash for tokens. If you win, you can bank up credits on a card, exchange for something you want or even change cryptocurrency back into real cash.

Where did cryptocurrency come from?

The 2008 Global Financial Crisis (GFC) resulted in the bailout of some of the world’s biggest banks. When the full horror of the GFC became apparent, and with the internet at everyone’s fingertips, people started to demand greater transparency. They also started questioning the value of printed money. 

Add to this the hyperinflation seen in some countries during the previous decade and the modern world was ready for some kind of monetary overhaul. 

Enter Bitcoin, the original cryptocurrency.

Can we use cryptocurrency like cash?

As our world becomes ever more globalised, is there a need for one internationally accepted form of currency? While cryptocurrency isn’t yet accepted by all businesses as a form of currency, it’s thought by many that it could happen in the not too distant future. 

Cryptocurrency is already considered an investment, the same as cash, bonds or property, so mainstream crypto acceptance is likely just around the corner. 

However, it does have its detractors, with some seeing it as a speculative investment, not a real one. Opposition voices include legendary investor Warren Buffett who compared Bitcoin to cheques by saying:

‘It's a very effective way of transmitting money and you can do it anonymously and all that. A check (cheque) is a way of transmitting money too. Are checks (cheques) worth a whole lot of money? Just because they can transmit money?’

An interesting point of view.

Buying cryptocurrency

To buy cryptocurrency, you need an online ‘wallet’ (app) and an account with an exchange that buys and sells digital currencies. And because you’re dealing with new, decentralised currencies (and that’s what makes it so appealing to so many after all) you need to be sure you’re dealing with people who know what they’re talking about.

Investing in cryptocurrency

It’s worth noting the Australian Tax Office (ATO) took until 2014 to address how cryptocurrency would align with existing laws and published its tax treatment of cryptocurrencies.

As with any other investment, trading in cryptocurrency will attract the attention of the ATO, with a recent article warning the ATO is looking closely at tax on cryptocurrency investors in Australia.

However, you should understand the ATO doesn’t see cryptocurrency as either Australian Dollars (AUD) or a fiat currency (a currency established by government regulation or law). It views it as property, meaning it attracts Capital Gains Tax (CGT). This means when you sell your cryptocurrency, its market value at the time of disposal, will be used to calculate either its capital gain or loss.

What is Capital Gains Tax (CGT)?

When you sell or dispose of an asset, the difference between the amount you paid for the asset and the amount you sell it for is called a capital gain. If you sell your investment for a loss, this is called a capital loss. You must report that gain or loss to the ATO in your annual tax return.

If you buy and sell your cryptocurrency investment within 12 months, and make a capital gain (profit), you’ll pay tax on the entire 100 percent of the profit.

But if you keep the investment for more than 12 months, you’ll only pay CGT on 50 percent of the profits.

Cryptocurrency tax in Australia and the ATO

If you think the ATO doesn’t know about your cryptocurrency investments, think again. The ATO has been collecting records from Australian Cryptocurrency Designated Service Providers (DSP) since May, 2019.

To dispel a common misconception that ‘cryptocurrency gains are tax-free or only taxable when the holdings are cashed back into Australian dollars’, as noted in this news article, ‘the Australian Taxation Office revealed it had extended a partnership with Australia’s cryptocurrency exchanges requiring them to hand over their trading data until 2022-23.’

Whether you’re a new investor looking to understand more about tax on cryptocurrency in Australia or an experienced investor looking to step into the world of digital currency, we’d love to set up a meeting. 

At Kelly+Partners we have Finance Specialists ready to help. Get started today!