Cryptocurrencies, also known as virtual currencies or digital currencies, are a form of digital token.
There are many different types of cryptocurrency – Bitcoin, Tether, Ether and many others. They are created from code using an encrypted string of data blocks, known as a blockchain.
The ATO treats cryptocurrency like shares and many other investments, so it is generally regarded as a capital gains tax (CGT) asset.
A non-fungible token (NFT) involves similar digital technology as other crypto assets. However, a non-fungible token is not interchangeable in the same way as crypto coins or tokens.
NFTs typically record ownership of digital pictures or artworks, video clips, memes and items used in online games.
The income tax treatment of non-fungible tokens (NFTs) follows the same general principles as cryptocurrencies.
In this article when we mention “cryptocurrency” we are also referring to NFT’s, where relevant.
A CGT event occurs when disposing of cryptocurrency. Events can include:
- selling cryptocurrency for a fiat currency
- exchanging one cryptocurrency for another
- gifting it
- trading it
- using it to pay for goods or services.
Most people hold cryptocurrency as an investment, which they hope will grow in value over time to give them capital gains.
Each cryptocurrency is a separate asset for CGT purposes. When you dispose of one cryptocurrency to acquire another, you are disposing of one CGT asset and acquiring another CGT asset.
If you hold cryptocurrency for 12 months or more, you may be entitled to a 50% CGT discount to reduce any capital gains made when you dispose of it.
Tax responsibilities
If you buy, sell or invest in cryptocurrency, you need to be aware of your tax responsibilities. Your tax responsibilities vary depending on your circumstances, but you need to keep records for all cryptocurrency transactions.
If you have transacted with a foreign cryptocurrency exchange you may have tax responsibilities in another country.
Follow these 3 steps to help you manage your tax responsibilities with cryptocurrency.
1. Report disposal of cryptocurrency
You must report a disposal of cryptocurrency for capital gains tax purposes. Disposing occurs when you either:
- exchange one cryptocurrency for another cryptocurrency
- trade, sell or gift cryptocurrency
- convert cryptocurrency to a fiat currency (a currency established by government regulation or law), for example to Australian dollars (A$).
Transferring cryptocurrency from one digital wallet to another digital wallet is not considered as a disposal as long as you maintain ownership of it. If your cryptocurrency holding reduces during this transfer to cover the network fee, the transaction fee is a disposal and has capital gain consequences.
2. Work out any CGT
If you exchange cryptocurrency for goods, cash or other cryptocurrencies, it is normally considered a disposal for the purposes of capital gains tax (CGT) and you may need to include a capital gain or loss in your tax return.
To work out your capital gain or loss, you need to determine the value of your cryptocurrency purchases and sales in Australian dollars. A capital gain or loss is the difference between the:
- cost base (cost of ownership, including the purchase price plus certain other costs associated with acquiring, holding and disposing of it)
- capital proceeds (what you receive or the market value of what you receive) when you dispose of your cryptocurrency.
If you:
- buy cryptocurrency using Australian dollars, the amount you paid is included in your cost base
- exchange one cryptocurrency into another cryptocurrency, your cost base is the market value in Australian dollars of the cryptocurrency at the time of the transaction
If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You can’t deduct a net capital loss from your other income.
3. Keep records
You need to keep records of all transactions associated with acquiring, holding and disposing of cryptocurrency, for five years after you dispose of the cryptocurrency,
Buying (acquiring)
You need to keep either:
- records of receipts of transactions
- documents that display
- the cryptocurrency
- the purchase price in Australian dollars
- the date and time of the transaction
- what the transaction was for.
You also need records showing:
- commission or brokerage fees on the purchase
- agent, accountant and legal costs
- exchange records.
Owning (holding)
You need to keep records of:
- software costs related to managing your tax affairs
- digital wallet records and keys
- documents showing the date and quantity of cryptocurrency received via staking or airdrop.
Disposing
You need to keep either:
- records of receipts of sale or transfer
- documents that display
- the cryptocurrency
- the sale or transfer price in Australian dollars
- the date and time of the transaction
- what the transaction was for.
You also need records showing:
- commission or brokerage fees on the sale or transfer
- exchange records
- calculation of capital gain or loss.
How to keep records
To help keep accurate records:
- set up a record keeping system, which can be as a simple as a spreadsheet or you can use professional software
- scan digital copies of your records to make it easier to store and access them.
Personal use assets and cryptocurrency
Some capital gains or losses that arise from the disposal of a cryptocurrency that is a personal use asset may be disregarded.
Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption
Cryptocurrency is not a personal use asset if it is kept or used mainly as any of the following:
- an investment
- part of a profit-making scheme
- in the course of carrying on a business.
Where cryptocurrency is acquired and used within a short period of time to acquire items for personal use or consumption, the cryptocurrency is more likely to be a personal use asset.
However, where the cryptocurrency is acquired and held for some time before any such transactions are made, or only a small proportion of the cryptocurrency acquired is used to make such transactions, it is less likely that the cryptocurrency is a personal use asset. In those situations, the cryptocurrency is more likely to be held for some other purpose.
In most situations, cryptocurrency is not a personal use asset and is subject to capital gains. However, some exceptions apply.
Only capital gains you make from disposing of personal use assets acquired for less than $10,000 are disregarded for capital gains tax purposes.
