Not Knowing the tax basics regarding your intended activity
As we discussed in part 1, Crypto Currency investing and use can sometimes create unexpected tax and other issues for clients. Often by the time an accountant is contacted, or it is exposed to them (i.e., through ATO data matching), it can be too late to adjust plans and investment decisions. This series of reflective articles from a practising accountant outlines some common traps and possible solutions to help clients through their journey.
Today, we focus on the tax side of things.
Are you trading Crypto Currency on an income basis, capital basis or just using it to pay for personal items? Do you understand when a taxing event occurs regarding your specific activity? Do you understand how timing of activity impacts on tax outcomes? These considerations are important in making informed investment decisions.
Potential pitfalls include:
- Clients experiencing realised gains and large unrealised losses resulting in large tax bills and less funds available to cover them.
- Clients selling Crypto Currency, creating a taxable event, but not understanding this has occurred because they have not removed the money back to Australian Dollars or out of the trading platform.
Where to go from here?
Covering all aspects relevant to your personal activity in one article is not going to work well, particularly considering all the different entity structures available (i.e., Company, SMSF, individual etc.). The best bet is to get some basic advice on the tax treatment regarding what you are personally proposing to do. Have a plan centred on your personal situation and activity so you know when taxing events occur and what the tax consequences are.
Although there are some grey areas, depending on the activity and number of trades, there are 3 main tax treatments for Crypto Trading. The following examples are based on the trader trading as an individual in their own name.
Income basis
There are many buys and sells, often transacted at fairly short intervals. The traders are usually looking for maximum returns over a short time frame. The profit or loss is calculated on sales, less opening stock, less purchases, add closing stock. No income discounts are available, and the profit or loss is reflected in the persons return. Any loss can reduce income from other sources, providing their adjusted taxable income is under $250,000.
Capital Basis
There are less buys and sells. If the asset is purchased and held for longer than 12 months and they do not have any other capital losses the person is entitled to a 50% discount on the capital gain. So, for example they buy the Crypto for $10,000 sell for $20,000, make a $10,000 Capital gain, they only need to pay tax on and reflect income of $5,000 in their tax return. Any capital losses are quarantined and can only be used to reduce other capital gains.
Personal Use Asset Basis
This is currently fairly rare, but I suspect as time goes on it will become more common. This is where the Crypto Currency is used to buy day to day expenses or purchase items, just like a normal Australian bank account. If the currency is used for this purpose, it is considered a personal use asset and therefore is not taxable. For example, you do not have a taxable event from the cash itself when you buy a TV.
If you have any questions or concerns about your Crypto Currency, of future currency, please contact us.
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