In its online guidance, the ATO has stated its view that Bitcoin (and other crypto or digital currencies that have similar characteristics) are capital gains tax (CGT) assets.
Investment & personal transactions
Where a person or entity has purchased Bitcoin for investment and is not carrying on a business of Bitcoin investment, any profit from resale will generally be assessable as a capital gain and not on revenue account.
The question is whether someone buying Bitcoin can evidence that it was purchased for investment purposes when there is no expectation of a periodic return, such as rent from an investment property or dividends from listed shares.
Like all other CGT assets, if the Bitcoin has been held as an investment by resident individuals and trusts for more than 12 months, a 50% CGT discount may apply to reduce the capital gain.
The ATO is clear in its view that Bitcoin is neither money nor a foreign currency. However, in such circumstances, the CGT rules or the profit-making scheme rules may operate similarly to the foreign currency tax rules in calculating the gain or loss on conversion from Bitcoin to Altcoin.
If the intention in purchasing Bitcoin is to use it to buy goods or services for personal consumption (i.e. retail goods, home utility services or food and beverages), then any profit from resale will be assessable as a capital gain and the 50% discount may apply. However, if the original cost of purchase was under $10,000, any gain made will be tax free as it is a “personal use asset”. This must be examined transaction-by-transaction. For example, if someone bought Bitcoins with $5,000 costs with the intention of buying goods or services when it is widely acceptable in the market and actually spent some Bitcoins for the purpose and later sold the Bitcoin at $15,000, he or she will be taxed on the gain.
It is important to remember that, each time Bitcoin is used to purchase goods or services for personal consumption, or Altcoin, it will be considered as a disposal for tax purposes.
Traders and speculators
For traders, speculators and those who buy Bitcoin with a profit-making purpose, any profit from resale will be assessable income (i.e. revenue income and not treated on capital account) unless such activity can be classified as a hobby. Expenses incurred in purchasing Bitcoin will be fully deductible for traders/speculators.
A profit-making purpose is likely to prevail in the majority of circumstances, as ownership of Bitcoin does not (at this point in time) entitle the holder to rent or a periodic return as may be the case with assets such as property or shares. Even if Bitcoin is held for a significant period of time, it may still be considered to have been purchased for a profit-making purpose, particularly in light of the absence of a periodic return.
However, as more businesses in Australia and around the world begin to accept Bitcoin as payment, there is an increasing case for the argument that Bitcoin was purchased for a purpose other than speculation or profit making.
Tax reporting and record-keeping obligations
Taxpayers have an obligation to report their assessable income each income year and to keep appropriate records to support their income tax return disclosures.
Given the decentralised and unobservable nature of cryptocurrency, it is likely that the ATO and other government agencies will not be able to track all transactions and trades — at least for the time being. However, if a taxpayer is living beyond their means, and reported income, they may nevertheless face an ATO review or audit. A decline in bank account activity could also be a trigger for ATO review or audit.
If the ATO conducts a review or audit and has reason to believe that a taxpayer has not reported all of their assessable income, it may issue them with an amended income tax assessment. If the taxpayer refuses to cooperate with the ATO, they may issue them with a default income tax assessment where they will estimate the taxpayer’s actual assessable income based on what they consider to be reasonable grounds.
Those investors/speculators who make a loss need to consider whether that loss is deductible (only if a profit-making purpose existed) or a capital loss on investment is available (only where acquisition costs are more than $10,000).
If a taxpayer has been issued with an amended or default assessment, they will have the onus of objecting to the assessment and proving that it is excessive.
Regardless of individual circumstances, if a taxpayer is transacting in Bitcoin they should keep a record of all of their trades and activity. In this regard, many exchanges will allow users to access and download their transaction history.
Finally, if a taxpayer is purchasing Bitcoins for both personal use and speculation, it is particularly important that they keep clear records. This is because it will be up to the taxpayer to show the intention behind each purchase and transaction.
