If you buy and sell cryptocurrencies, it’s very important to understand the capacity in which you do so. That is, are you buying and selling as an individual investor or as a business entity such as a trading business?
For most people, the answer is as an individual. But for some, it’s either as a business entity or a bit of both. Regardless of your circumstances, it’s imperative to understand which category (or categories) you fall into, as there are different implications surrounding tax treatment and reporting requirements.
As mentioned above, most cryptocurrency buyers and sellers are individual investors. They buy cryptocurrencies in the hope they appreciate over time. Come tax time, Australians in this category have to report capital gains or losses as a capital gains tax (CGT) on their income tax return (if you’ve ever invested or traded in stocks, none of this should sound foreign to you).
You may not need to report CGT if you used cryptocurrencies for personal use in the current financial year. If you’ve bought cryptocurrencies with the intention of using them to buy personal items worth under $10,000 AUD, you’re likely to be deemed as having used cryptocurrencies for a personal transaction (it’s important to note that the burden is on you to justify and prove your intent – relatively few people fit under this category).
Some factors the ATO consider when determining if you bought cryptocurrencies for personal use:
- How long you held it prior to sending it.
- Was the purchase made in a game or entertainment platform?
- What was the original intention or specific reason that cryptocurrency was used to buy the good or service?
Businesses have significantly greater reporting requirements to the ATO as well as different tax treatments of their cryptocurrency buys and sells.
One key difference is that cryptocurrency held by a business isn’t treated as a capital item. This means any cryptocurrency sales don’t attract CGT and are ineligible as far as any the CGT discount goes.
There isn’t a single factor that determines whether you’re “in the business of buying and selling cryptocurrency.” That said, some key characteristics of running a business are listed below.
- Operating under a registered business name or Australian Business Number (ABN).
- Your intention of the operation is to make a profit.
- You repeat similar types of activities.
- Your activity is planned, organised and carried out in a business-like manner (e.g. record keeping or having a business-specific bank account).
If you don’t satisfy many of the above criteria, you’ve likely bought and sold cryptocurrency as an individual investor.
A trading business is generally reported similar to a business that sells goods, where the sales of cryptocurrencies are recorded as assessable income and buys are treated as cost of sales.
If you are operating a business as a trader, you may be entitled to claim additional tax deductions for other business-related costs that relate to your trading activities. These may include:
- Trading fees
- Internet and home office costs
- Mobile phone and telephone
- Trading software
- Accounting fees or other professional fees
- Asset depreciation
Can I Be an Investor As Well As a Trader?
Yes, you may choose to have a long-term investment portfolio and also a trading portfolio of cryptocurrencies. You must clearly demonstrate that both portfolios have different intentions to ensure that different tax treatment.
Cryptocurrency taxation can be very ambiguous for uninformed investors and traders, so if you’re unsure about your tax obligations, it is recommended you see a cryptocurrency tax specialist.