There’s no doubt that the explosive growth of Bitcoin and other similar crypto-currencies has been the financial fad of 2018 so far. With explosive growth in recent months (and periodic crashes), it’s been possible to make (and lose) substantial sums of money over startlingly short time periods and many inexperienced investors (or should we call them speculators?) have been drawn into the net of this latest monetary craze.
One thing to bear in mind if you’re considering getting into crypto-currencies, or are already involved, is that there are tax implications to trading and investing in these new digital products. Here’s our guide to tax and bitcoin.
What is Bitcoin?
Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.
It’s the biggest example of a growing category of money known as cryptocurrency.
There are three ways to get bitcoin – by mining them, buying them or providing good and services to earn them. Mining refers to the process by which bitcoins are created – a computer crunches through a set of difficult mathematical problems and success is rewarded with a bitcoin.
The alternative is to create an ‘online wallet’, visit a bitcoin exchange system that puts sellers in touch with buyers and the buyers pay for bitcoins purchased by transferring money via online banking.
The third way is possible because bitcoin is becoming an increasingly accepted virtual currency used by businesses and individuals around the world, including in Australia.
How is Bitcoin Taxed?
Using bitcoin to pay for personal transactions
Generally, there are no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using bitcoin).
Bitcoin is a regarded as a capital gains tax (CGT) asset so CGT potentially applies whenever an Australian resident sends a bitcoin to another person. However, transactions are exempt from capital gains tax if:
- bitcoins are used to pay for goods or services for personal use – e.g. Expedia hotel bookings, or at a café which accepts bitcoins, and
- the cost of the bitcoins used to pay for the transaction is less than $10,000 (this is the exemption for personal use assets).
If the cost of the bitcoins used in the transaction exceeds $10,000, the personal use exemption will not be available, and CGT will apply. The capital gain is calculated as the increase in value of the bitcoins between the time they were acquired and the time they were disposed of.
Using Bitcoin to buy and sell goods and services in a business
If you receive bitcoin for goods or services provided as part of a business, you will need to record the value of the bitcoins in Australian dollars as part of your ordinary income for tax purposes. The value in Australian dollars will be the fair market value which can be obtained from a reputable bitcoin exchange, for example.
Where you carry on a business and purchases business items (including trading stock) using bitcoin, you are entitled to a tax deduction based on the arm’s length value of the item acquired.
There may also be capital gains tax consequences where you dispose of bitcoin as part of carrying on a business. However, any capital gain is reduced by the amount that is included in assessable income as ordinary income (so you aren’t taxed twice on the same amount).
Where you are in the business of mining bitcoin, any income that is derived from the transfer of the mined bitcoin to someone else is included in assessable income.
Any expenses incurred in respect of the mining activity are allowed as a deduction.
Losses made from the mining activity may also be subject to the non-commercial loss provisions, so they won’t automatically be available to offset against other income (there are tests you’ll have to meet first)
Bitcoin held if you are carrying on a business of mining and selling bitcoin is considered to be trading stock. You’d need to bring into account any Bitcoin on hand at the end of each income year.
Taxpayers conducting a Bitcoin exchange (including bitcoin ATMs)
Where you are carrying on a business of buying and selling bitcoin as an exchange service, the proceeds derived from the sale of bitcoin are included in assessable income.
Any expenses incurred in respect of the exchange service, including the acquisition of bitcoin for sale, are deductible.
Bitcoin held by someone carrying on a bitcoin exchange is considered to be trading stock and you would be required to bring to account any bitcoin on hand at the end of each income year.
Disposing of Bitcoin acquired for investment
If you acquire bitcoin as an investment, any profits resulting from the sale are not assessable income and no deductions can be claimed.
Capital Gains Tax will apply although where the cost of the Bitcoin does not exceed $10,000 the personal use asset exemption may apply if you can demonstrate that the bitcoin was to fund personal consumption.
Where the cost of the Bitcoin exceeds $10,000, the personal use exemption will not be available and CGT will apply. The capital gain is calculated as the increase in value of the Bitcoins between the time they were acquired and the time they were disposed of.
If the transactions amount to a profit-making undertaking or plan, then the profits on disposal of the Bitcoin will be assessable income since you will be regarded as a trader in bitcoin rather than an investor.
Note: the rules around trading Bitcoin for business or profit versus buying and selling Bitcoin as an investment are essentially the same as those applying to share traders versus investors. There are other factors to take into account but broadly, if you are holding the bitcoin with a view to long term gain, you are likely to be an investor and if you are buying and selling bitcoin over the short term with a view to making profits, you are likely to be a trader.
Everyone dealing with bitcoins need to keep the following records:
- the date of each transaction
- the amount in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for, and
- details of the other party (the bitcoin public address is enough).
If you want to rely on the CGT personal use exemption, you’ll need to be able to demonstrate that you actually did use the bitcoin to buy goods and services or that you intended to.