A glance at the tax treatment of Cryptocurrency
When dealing with Cryptocurrency (crypto), the first issue to consider is whether these are held as CGT assets, trading stock or personal use assets, as the tax treatments in each case are very different.
Crypto held as Capital Gain Tax (CGT) asset
This is when investors who buy and sell cryptos as investments, do so with the goal of gradually building up a portfolio over time to make a long-term gain. They hold cryptos as CGT assets and incur a CGT event when disposing of these crypto assets by:
· Selling the crypto asset;
· Gifting the crypto asset;
· Exchanging the crypto asset for another crypto asset;
· Converting the crypto asset into Australian or foreign currency; or,
· Buying goods or services with the crypto asset.
When calculating CGT, the value of crypto assets is required to covert into Australian dollars based on the spot exchange rate set by a reputable digital currency exchange at the time of transactions. A 50% CGT general discount may be available if holding period is more than 12 months.
In case of crypto chain splits,
· If one succeeding crypto has the same rights and relationships as the original crypto, it will be regarded as a continuation of the original asset (i.e., no CGT event happening), whilst the other cryptos from the chain split (including rewarded cryptos) will be regarded as new CGT assets with zero cost base;
· If none of the succeeding crypto has the same rights and relationship as the original crypto, a CGT event C2 loss happens to the original crypto, whilst the other cryptos from the chain split will be regarded as new CGT assets with zero cost base.
In case of cryptos lost or stolen, taxpayers can claim a capital loss if there are no means to recover (for instance losing a private key).
Crypto held as trading stock
For taxpayers who are frequently trading cryptos for short-time gains, forging or mining cryptos, or running a crypto exchange, they will be regarded as carrying on a business, with cryptos held as trading stock and selling proceeds assessed as ordinary business income
The cost of goods sold (COGS) is calculated as the opening stock plus purchases less the closing stock, applying the ordinary trading stock valuation methods (cost price, market selling value or replacement value). Particularly, in case of borrowing cryptos for staking, the borrowed crypto will become part of the trading stock at the market value of borrowing.
Meanwhile, the market value of new cryptos received as “staking rewards” or “airdrops” will be treated as ordinary income at the time of receiving.
Crypto held as personal use asset
Lastly, when a crypto asset is mainly used for personal use or consumptions, rather than trading, investment or other profit-making purposes and the cost is less than $10,000, it would be regarded as a personal use asset, with disposal gains or losses exempt from CGT.
Generally, the shorter the holding period is, the more likely a crypto asset would be regarded as personal use asset.
If you have any questions or need any advice regarding the above, please contact our office for assistance.
Aspire2 Accountants