With the price of 1 bitcoin reaching US$10,000 this week, it is certainly a hot topic in investment circles.
We have been asked by a number of people about the tax implications of investing in cryptocurrencies, like bitcoin.
There are many different ways in which you can acquire and utilise bitcoin which will give rise to differing tax implications.
Bitcoin received in exchange for goods and services
If your business receives bitcoin as payment for your goods or services, the receipt of the bitcoin is ordinary income for your business (and taxed as ordinary income).
Bitcoin used to purchase personal use assets
If you purchased A$10,000 worth of bitcoin, and you use this bitcoin to purchase personal use assets, any gain or loss on the bitcoin is disregarded for income tax purposes.
Bitcoin used for personal investment
Some people are investing in bitcoin for the purpose of deriving a gain when bitcoin increases in value. In this situation, any resulting realised gain may be taxed as ordinary income or as a capital gain, depending on the circumstances. This means, the gain is only taxable when the bitcoin is either sold or exchanged for another currency.
Tax Determination 2014/26 (“TD 2014/26”) confirms that a bitcoin is a CGT asset. It also considers whether the purchase and sale of bitcoin would be treated as ordinary income or as a capital gain for tax purposes.
Tax on ordinary income vs Tax on capital gain
If the gain on disposing of your bitcoin is taxed as ordinary income, it will be added to your other income (salary, interest, dividends etc) and taxed at your marginal tax rates. The gain will not be eligible for the 50% CGT discount and cannot be offset against any capital losses. However, if you make a loss on the bitcoin, it can be offset against your other income (salary, interest, dividends etc).
Conversely, if the gain is taxed as a capital gain, it may be eligible for a 50% discount if the bitcoin has been held for more than 12 months. It may be reduced by any current year or carried forward capital losses. However, if it is regarded as a capital transaction, any losses will can only be offset against current or future capital gains.
Whether the transaction is ordinary income or a capital gain will depend on the facts and circumstances of each case.
Your bitcoin profit – ordinary income (trader) or capital gain (investor)?
Paragraph 24 of TD 2014/26 suggests the following facts may indicate the transaction is capital in nature:
A small amount of bitcoin was acquired as a hobby;
After two years the taxpayer decides to sell the bitcoin for a small profit.
The relevant factors from the example appear to be the amount invested, the time invested and the return on the investment.
Paragraph 22 of the determination sets out that the Commissioner considers that a gain on the sale of bitcoin will be ordinary income where the taxpayer entered into the transaction for the purpose of making a gain and the transaction entered into was a commercial transaction.
Overall, the following factors will be considered when determining whether the transaction will be taxed as ordinary income or as a capital gain:
The amount of money invested;
The length of time the money was invested;
The original purpose of the investment;
The amount of profit derived on the sale;
Whether the bitcoin had any other use.
Exchanging bitcoin for another cryptocurrency
If you trade your bitcoin for another cryptocurrency, you are disposing of your bitcoin (which will be subject to Australian tax) and acquiring the new currency.
As you can see, the tax treatment of bitcoin transactions vary depending on the purpose and nature of each transaction. It is important that you seek professional advice in relation to the tax implications before entering into any transactions.
If you would like to discuss the tax implications of bitcoin, please call us on (07) 56656469.
DISCLAIMER: The information in this article is general in nature and is not a substitute for professional advice. Accordingly, neither TJN Accountants nor any member or employee of TJN Accountants accepts any responsibility for any loss, however caused, as a result of reliance on this general information. We recommend that our formal advice be sought before acting in any of the areas. The article is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our consent,