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What you need to know about the taxation of crypto
With tax season right around the corner, lawyers and non-lawyers alike who have money invested in cryptocurrency need to be across how it is and will be taxed, writes Shay Sorefan.
Shay Sorefan
In this ever-so-evolving technological era driving our economy in 2022, consideration is to be given to the advent of cryptocurrency. With a global market now totalling the trillions of dollars, the tremendous potential of blockchain technology and decentralised finance is now being recognised in mainstream society, with around 25 per cent of Australians either currently or previously held cryptocurrency.
Cryptocurrency in itself, although bearing the name “currency”, is considered under the Australian Law as a “personal asset” rather than an actual currency. This means that any profit derived from selling cryptocurrency or even NFTs would be subjected to capital gains tax, just as if it were property: cryptocurrency bears some characteristics that have been found to be, by definition, an asset or property for tax purposes such as the digital representation of value of a bitcoin, its unique bitcoin address and the exclusivity of a keypair associated with the same. This is highly reminiscent of ownership and control rights exerted by owners over their property.
When is your cryptocurrency going to be taxed?
The disposal of bitcoin to a third party gives rise to a capital gains taxation (CGT) event A1 pursuant to s 104.10(1) of the Income Tax Assessment Act 1997 if the capital proceeds from the disposal of the bitcoin are more than the cost of acquiring the bitcoin (a profit is made). In the case of an exchange for example, the capital proceeds from the disposal of the bitcoin are calculated in accordance with the money or the market value of any other property received by the taxpayer through the exchange.
What if you purchase cryptocurrency as a speculative investment?
Pursuant to s 118.10(3) of the Income Tax Assessment Act (1997), if a taxpayer acquires cryptocurrency, say bitcoin, with the intention to purchase an asset used or kept for personal use or enjoyment, for example, to purchase online merch or games, any gains made from for instance the increased value of the remaining bitcoin would be tax-free and disregarded.
However, if the remaining bitcoin is then converted to the fiat currency or transferred to a third party as a payment gateway for settling bills or buying other goods, it would not be a personal-use asset, and any capital gains made from that transaction are taxable. However, if a taxpayer keeps the rest of the bitcoin as a speculative investment, it is less likely that the remaining amount would be considered a “personal asset” and would be taxed accordingly as a capital gain.
What if you ‘mine’ cryptocurrency?
“Mining” is a purely mathematical process involved in solving cryptographic equations through which the “miner” obtains a number of newly created bitcoin addresses. In this situation, there are several things that determine how this cryptocurrency is taxed: we need to look at factors involved in the process, including the amount of money involved, whether bitcoin has been disposed of or converted, the profit margin and the length of time the bitcoin was held before disposal.
In the event a taxpayer “mines” bitcoin as a hobby and investment, the taxpayer will be taxed under the CGT provisions contrastingly, if the “miner” engages in mining on a sustainable basis and derives significant income from the same on a regular basis, any profit made from these transactions would be taxed as ordinary income.
Shay Sorefan is a government lawyer at McCabes.
