An increasing number of Australian taxpayers are using technology in investments and wealth management. 

The availability of smart phone apps for cryptocurrency exchanges and wallets means an increased number of taxpayers are now accessing new and emerging forms of investment. Taxpayers or advisers who are unfamiliar with online trading platforms or cryptocurrency and blockchain technology may be presented with challenges in identifying tax transactions and reporting them in returns. 

The increased use of technology in investment management and wealth creation may, however, lead to unexpected tax issues due to transparency and reporting issues. Taxpayers or advisers who are unfamiliar with online trading platforms or cryptocurrency and blockchain technology may be presented with challenges in identifying tax transactions and reporting them in returns. 

Cryptocurrency

Cryptocurrency as a concept first emerged in 2008 when blockchain technology was implemented to create Bitcoin.  

Bitcoin was created as a form of cash, that could be sent via a peer-to-peer network without the need for a central bank or regulatory authority. Since 2019, various other cryptocurrencies have emerged including (but not limited to) Ethereum, Litecoin, Cardano, and Dogecoin. The anonymity of blockchain was an incentive for some investors who were under the false presumption gains would be hidden from the eyes of regulatory bodies including the Australian Taxation Office (‘ATO’). 

Regulatory requirements implemented by the Australian Transaction Reports and Analysis Centre (‘AUSTRAC’) and the Australian Securities and Investments Commission (‘ASIC’) mean strict registration and reporting requirements now apply to Digital Currency Exchanges (‘DCE’).  

The ATO has collected data on cryptocurrency trades under its cryptocurrency data matching protocol since April 2019, which means there is limited (if any) anonymity when it comes to cryptocurrency.

In Australia, cryptocurrency is treated as a capital gains tax (‘CGT’) asset. This means tax consequences may arise when a taxpayer trades cryptocurrency or converts it to cash. 

Common scenarios involving cryptocurrency that may trigger a taxable CGT event include where a taxpayer:

  • Uses cryptocurrency to pay for goods and services from a store that accepts cryptocurrency as payment;ommon scenarios involving cryptocurrency that may trigger a taxable CGT event include where a taxpayer
  • Exchanges existing cryptocurrency assets (e.g., Bitcoin) to acquire a different cryptocurrency asset (e.g. Dogecoin); or
  • Converts cryptocurrency to cash (Bitcoin for example can be converted to cash at certain ATMs).

The tax consequences for individual taxpayers will be dependent on the facts, and whilst for many taxpayers exchanging or converting cryptocurrency will trigger a CGT event, for others, cryptocurrency may be treated as trading stock. Obtaining tax advice from a suitably qualified adviser is essential.

Initial Coin Offerings, Mining and Staking Rewards

The tax implications of holding and transacting with cryptocurrency are not limited to the exchange or conversion of cryptocurrency assets. 

Tax implications may also arise where a taxpayer acquired cryptocurrency from ‘mining’, from initial coin offerings (‘ICO’) or from staking rewards.

CRYPTOCURRENCY MINING

Broadly speaking, blockchain ‘mining’ is where an individual or entity uses computer hardware assets to compete against other ‘miners’ to verify and solve encrypted data on a blockchain. 

When the ‘miner’ solves the encryption first (think of a large computer game) they are rewarded with cryptocurrency for their efforts while the other miners receive nothing, and all miners move onto the next block in the chain. The reward for effort may be required to be included as assessable income in the hands of the recipient, as the effort and processing power required to mine cryptocurrency is quite high and is likely to be deemed as revenue. 

STAKING REWARDS

Investing via a particular cryptocurrency exchange or investing in a new cryptocurrency may result in the issue of ‘free’ cryptocurrency as a reward, which may also need to be reflected as assessable income in the hands of the recipient. 

Staking rewards are earned by ‘staking’ your cryptocurrency in an exchange to be used by the exchange, similar to earning interest off of money in a term deposit. These rewards may also represent taxable income with the taxable value generally determined by the market value of the cryptocurrency asset at the time of issue.

The key challenge for taxpayers and their advisers is surprisingly not identifying and calculating the tax consequences, it is translating the unfamiliar and sometimes complex technical language and extracting data into readily identifiable and usable form. 

Taxpayers or advisers who are unfamiliar with online trading platforms or cryptocurrency and blockchain technology may be presented with challenges in identifying tax transactions and reporting them in returns. 

Platforms such as Koinly and Kovatax have developed software to assist taxpayers in preparing cryptocurrency tax reports, however when it comes to tax return preparation, expert tax advice from an adviser with knowledge of cryptocurrency and blockchain technology is a must.

In summary, if you have an app on your smart phone or device that you use to buy and sell cryptocurrency, or any other online investment platforms, we strongly recommend you discuss the potential tax consequences with your tax adviser. If the app or online platform doesn’t provide you with detailed trade records, or an Australian tax summary, you could be in for an unwelcome surprise when it comes time to prepare your tax return.

For further information

The contents of this article are for information only and do not constitute financial or taxation advice.  If you require specialist taxation advice, please reach out to your local RSM office.