Whether a crypto-dabbler or serious crypto-currency trader, anyone thinking they have a free ride past the tax tollgate will be in for a shock. The ATO is fine-tuning its strategy to chase and bill those failing to declare their gains resulting from the sale of bitcoins – or any other type of cryptocurrency.
The rise of Bitcoin
Bitcoin has been around since 2009, but it has come under growing scrutiny particularly since December 2017, when its value abruptly rocketed from nearly US$1,000 to US$20,000. That astronomical surge in value motivated individuals and entities to frenetically trade bitcoins and some of them made considerable profits out of it. The binge did not last that long as the price sharply plunged to US$7,000 in February 2018. But its use as a form of payment and as an investment hasn’t stopped since then.
Due to its veil of anonymity, thanks to the reliance of decentralised system as blockchain and secured encryption technologies, the use of cryptocurrency as a way to flow undetected a good number of transactions without being levied has concerned the ATO since 2014 when it started to release rulings and guidance on its view of the taxation of bitcoins.
But it is now when ATO can test its capability of collecting the tax harvest as a result of the December 2017 frenzy. Reportedly, there are crypto buyers that joined the gravy train and made a fortune out of selling cryptocurrencies. So if some of them are put in the spot by the ATO, they can argue the absence of a profit-making plan when they acquired bitcoins before their price ramped up.
But not only the tax angle is under the spotlight, the cryptocurrency vulnerability to hackers, scams, anti-money laundering and financial terrorism are also worries for the criminal authorities. For instance, the Australian Transaction Reports and Analysis Centre (AUSTRAC) is now empowered with new legislation to track down and draw the veil to hitherto secretive exchange accounts, which in turn will be shared with the ATO to detect the taxable income.
What are the tax implications in Australia?
The ATO, as well as other tax regulators around the world, considers that cryptocurrencies are ‘a form of property’ rather than being a currency. This means for example that bitcoins are assets and like any other asset (share or bonds), it will be taxed as a capital gain or as a revenue depending on whether the holder is an investor or trader. However, there will not be tax consequences if you are a personal user.
Investor – if you purchase bitcoin as an investment, you have to pay tax on any capital gain (CGT) you make upon selling it. But if you have held the digital asset for 12 months or longer, you will obtain a 50% discount. The other 50% will be included as assessable income.
Trader – if you run a business and receive bitcoin as payment for goods and services you sell, or uses bitcoin to make purchases for your business, you are required to include the arm’s length Australian dollar value of the bitcoin transactions in calculating your assessable income. Likewise, if you trade bitcoins, the profits you make will form part of your assessable income.
Personal user – there are no tax implications for bitcoin if you are a personal user as any capital gain or loss made on selling the bitcoin will be disregarded if the bitcoin cost was under $10,000. To be personal use, you have to look into the intention as well. For instance, you purchased a bitcoin in order to pay a concert ticket. Even if you made a profit out of it, it will be disregarded because you used it for your own consumption.
This personal user exemption will be one of the arguments available for those crypto buyers who became wealthy seeking to not be taxed on capital gains as if they were investors. It is expected that some of them will find relief by applying to private ruling in the hope of obtaining a favourable view from the ATO.
ATO’s arsenal to crack down on crypto gains
In an effort to raise tax revenue, the ATO counts with an array of resources to crack down on cryptocurrency, amongst others:
Data-matching – the ATO will use compulsory 100-point identification checks for Bitcoin investors.
Exchanging data with AUSTRAC – ATO will have access to valuable AUSTRAC data containing the identity of their customers and suspicious transactions over $10,000.
As with any failure to declare income, penalties will apply. Follow this topic in our Weekly Tax Bulletin online with Checkpoint and now in Proview ebook-format for phone and tablet.