The Commonwealth Bank announced that it is now Australia’s first bank to offer customers the ability to buy, sell and hold crypto assets, directly through the CommBank app earlier this month. Once one of the big four comes on board, you know cryptocurrency has become normal.
The Australian Taxation Office recently updated its guidance on cryptocurrency tax. Here are some of the commonly asked questions about the implications of investing in blockchain.
Am I an investor or a trader?
An investor’s goal is to gradually build wealth over time through buy-and-hold of a portfolio of investment while a trader is frequently buying and selling to make returns that outperform buy-and-hold investing. Another major difference is that an investor casually trades crypto while traders trade crypto as a business. Most Australian crypto users fall into this category.
Is mining cryptocurrency income or an asset?
If you receive crypto from providing services to others, this can represent income. If you create crypto, you acquire a capital gains tax (CGT) asset. A taxing event will arise when you exchange crypto for Australian Dollars or another crypto asset.
Does the ATO really know about my crypto transactions?
The ATO is using various sources for data collection including digital service providers (DSPs) and analysis software to track taxpayer compliance. There are several data-mining projects (no pun intended) underway looking specifically at cryptocurrency and cryptocurrency platforms.
What happens if my cryptocurrency is stolen?
You may be able to claim a capital loss if you lose your cryptocurrency private key or your cryptocurrency is stolen. Generally, where an item can be replaced it is not lost. A lost private key can't be replaced. Therefore, to claim a capital loss you must be able to provide the following kinds of evidence:
- When you acquired and lost the private key
- The wallet address that the private key relates to
- The cost you incurred to acquire the lost or stolen cryptocurrency
- The amount of cryptocurrency in the wallet at the time of loss of private key
- That the wallet was controlled by you (for example, transactions linked to your identity)
- That you are in possession of the hardware that stores the wallet
- Transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity.
I mine cryptocurrency as a hobby so I should not have to pay tax on it?
Unfortunately, it’s unlikely mining for fun will allow you to avoid tax. The circumstances where you can generate cryptocurrency or transact it without paying tax are very limited. In most cases, any profits gained will be subject to Capital Gains Tax.
When will I be subject to Capital Gains Tax?
A CGT event occurs when you dispose of your crypto. Dispose means to sell, gift, trade, exchange, convert or use crypto to buy things. Importantly, if you hold it for 1 year before disposing, you'll pay 50% less tax on crypto gains. If you are considered a trader, you cannot access this discount and proceeds are taxed as income.
Can I get a tax deduction for computer equipment purchased for mining?
If you are in the business of mining, then you can claim a deduction for the equipment you purchase to generate income. If you are not carrying on a business, then the crypto is held as an investment and the equipment is not deductible.
How is my NFT artwork taxed?
As with any other cryptocurrency, an NFT can be held for personal use. Personal use assets are CGT assets that you keep mainly for your personal use or enjoyment.
NFT is not a personal use asset if it is kept or used mainly:
- As an investment
- In a profit-making scheme, or
- In the course of carrying on a business.
The relevant time for working out if an asset is a personal use asset is at the time of its disposal. During a period of ownership, the way that an NFT is kept or used may change (for example, NFTs may originally be acquired for personal use and enjoyment, but ultimately kept or used as an investment, to make a profit on ultimate disposal or as part of carrying on a business).
The longer an NFT is held, the less likely it is that it will be a personal use asset – even if you ultimately use it for personal use or consumption.
Capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded. Collectables are not classed as personal use assets and may be subject to CGT.
Can my Self-Managed Superannuation Fund invest in cryptocurrency?
The issue is not so much can you acquire cryptocurrency within an SMSF but should you? The June 2021 ATO statistical report shows that Australians held approximately $212m in cryptocurrency assets as at 30 June 2021- only 0.03% of total assets. The simple reason is that the volatility of cryptocurrency makes it harder to rationalise under Section 62 of the Superannuation Industry Supervision (SIS) Act, particularly if the asset allocation ratio of cryptocurrency assets in the SMSF is high. But, it’s not impossible if managed correctly at an investment and administrative level.
With Bitcoin as low as $14k on 13 September 2020, and $61k on 12 September 2021, it’s easy to see the appeal for investors with the appetite for risk (335% return across 12 months). In this same period, Ethereum grew 767%. But the world was in a different place in September 2020, not just in cryptocurrency.
Before investing in cryptocurrency there are a few things SMSF trustees need to be aware of:
- Trust Deed - the trust deed of the fund must allow for cryptocurrency assets. Most SMSF trust deeds are drafted broadly to enable trustees to invest in assets permitted by the superannuation laws and leave the investment strategy to manage the choice of assets and their appropriateness. However, it is important to check.
- Investment strategy - Your Investment Strategy is a major consideration with any investment within an SMSF but with cryptocurrency’s high volatility and risks, there must be clearly articulated information in the Investment Strategy. That is, it must articulate the trustees’ plan for making, holding, and realising assets in a way that is consistent with the retirement goals of members being mindful of the member’s individual circumstances.
- Separation of assets – it’s important that the cryptocurrency assets are held in a wallet in the name of the SMSF and the IP address is provided to the SMSF auditors to verify the transactions (against the fund bank account). Problems can often arise when a wallet (in the name of the SMSF) is connected to a personal credit card to acquire cryptocurrency. In these cases, the payment is seen as either a contribution or a loan to the SMSF.
The ATO also suggests you look at the diversity of the SMSF’s investments.
Due to the level of complexity of the cryptocurrency universe, we’d recommend you always seek an expert’s advice before considering these investments. Please do not hesitate to reach out to us and we’ll point you in the right direction.