In just over one week the current tax year will come to an end and it will be time for Australia to think about those pesky tax returns once again.
For some investors, though, this year could be a little different than previous years due to the explosion in popularity of cryptocurrencies at the end of 2017.
If you were one of many Australians that dabbled in cryptocurrencies during the current tax year, the ATO will be looking out to make sure you declare it on your tax return.
According to the ATO, Bitcoin (BTC) is “neither money nor Australian or foreign currency. Rather, it is property and is an asset for capital gains tax (CGT) purposes. Other cryptocurrencies that have the same characteristics as Bitcoin will also be assets for CGT purposes and will be treated similarly for tax purposes.”
What are the tax consequences for Bitcoin and other cryptocurrencies?
If you acquired cryptocurrencies as an investment you will most likely have to pay tax on any capital gain made on the disposal of the asset.
Further, you would not be entitled to the personal use asset exemption, however if you held the cryptocurrency for 12 months or more, you could be entitled to the CGT discount of up to 50%.
And if you were one of the unfortunate traders that bought high and sold low after prices collapsed, you will have made a capital loss. This capital loss can be used to reduce capital gains made in the same year or saved for a later year.
It is important to note that these net capital losses cannot be used to offset against other income.
Don’t forget also that swapping one cryptocurrency for another would result in a capital gain if the price at the time of swapping is higher than when you bought it. In the eyes of the ATO, all you have done here is sell one CGT asset to buy another.
What about personal use?
One of the major aims of cryptocurrencies is of course to replace cash as a means of payment. If you have been using Bitcoin to purchase items for personal use, then the capital gains or losses that occur may be disregarded for purchases of up to $10,000. It would be advisable to keep receipts or proof of purchases in case the ATO comes calling.
And professional traders?
According to the SMH, if you’re a business that trades cryptocurrencies like DigitalX Ltd (ASX: DCC), then you might be able to declare your gains as normal income and not capital gains. To be classed as a business you’ll almost certainly require a business plan, name, and show repetition and regularity in your business activities.
Cryptocurrencies may be anonymous but that doesn’t mean the ATO cannot track down traders once funds have been converted back into fiat currency. So be careful not to overlook any cryptocurrency gains in your tax return this year, or else you could be fined.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.