Many cryptocurrencies have suffered a dramatic decline in price over the past year in various parts of the world. As a result, businesses, traders, and investors have unrealised losses on their books or have crystallised losses.
There are a number of considerations which are evolving in the tax landscape. We have included some tips and tricks to be aware of if you or your business hold crypto assets in Australia.
How does the tax office view crypto currencies?
Crypto-assets are characterised as a type of digital currency where records are kept and transactions are validated by a decentralised system employing encryption as opposed to a central authority.
Interestingly, cryptocurrency is not a currency for tax purposes, but it is a CGT asset.
What is the tax treatment of cryptocurrency?
The most common characterisations of Crypto currencies are as:
an investment asset – which generally means that it is held on capital account and that losses can only possibly be applied to offset potential future capital gains.
an asset purchased as part of a profit-making scheme – meaning that any losses will only be recognised after the cryptocurrency has been sold
an asset purchased as trading stock of a business –which means that the trading stock provisions govern the timing of loss deductions.
Case study
- Satoshi, operates a business through her company Satoshi Pty Ltd. It creates and trades in Non-Fungible Tokens (NFTs). Satoshi uses the crypto, ETH-BITCOIN, to purchase NFTs and receives ETH-BITCOIN when she sells her NFTs.
- Satoshi’s company usually has significant reserves of ETH-BITCOIN that she uses to acquire NFTs and pay expenses in relation to the business. During the 2022 income year, ETH-BITCOIN experienced a significant fall in price.
- Satoshi needs to work out how these unrealised losses are treated for income tax purposes. If the ETH-BITCOIN is a capital asset or purchased as part of a profit-making scheme, any losses will only be available once the ETH-BITCOIN has been sold and the losses are realised.
- In this case however, provided that the company is operating a business trading NFTs, its ETH-BITCOIN is likely to be trading stock. This is also the ATO view. The issue is likely to be whether Satoshi Pty Ltd meets the threshold for carrying on a business.
What is the tax treatment for Crypto assets held as trading stock?
If ETH-BITCOIN is trading stock, then Satoshi’s company must treat:
the cost of acquiring ETH-BITCOIN as a deduction
the sale of any ETH-BITCOIN as assessable income
assess the difference between the value of the trading stock at the beginning of the year and at the end of the year.
If the value is higher at the end of the year, the difference will be assessable income. If the value is lower at the end of the year, the difference will be a deduction.
Importantly, Satoshi can choose to value ETH-BITCOIN at the end of the year at its market selling value.
This may mean that Satoshi’s company can access the company’s unrealised losses on the decrease in value of its ETH-BITCOIN and claim this as a deduction.
Income tax loss rules can be complicated, particularly in the context of share trading and cryptocurrency. For more information, please contact us.
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