It’s no secret that the rapid rise of Bitcoin and similar cryptocurrencies has become an investment option that has gained popularity during the past few years. With the rapid growth (and frequent crashes), it’s been possible to lose and make massive amounts of money over astonishingly short periods, and even novice investors have been enticed by the latest fad in cash.
If you’re thinking of getting involved in cryptocurrency or are already involved, it is important to know the tax consequences of investing and trading in these innovative digital products.
BITCOIN: What Is It?
Bitcoin is a type of digital currency that is created and managed electronically. No one controls it, and it isn’t printed as euros or dollars; instead, they are created by businesses and individuals operating computers worldwide, using software that solves mathematical issues.
It’s the most prominent instance of a new type of money known as cryptocurrency.a
Three ways are available to acquire Bitcoin:
By Mining. This method creates bitcoins through computers, where a machine solves a series of mathematically challenging problems, and the winner is bitcoin.
By purchasing them. You can set up an online wallet via an exchange platform for bitcoins, connecting sellers with buyers. Buyers pay for bitcoins by making payments online via banking.
By offering quality and services that earn. Bitcoin is now an increasingly popular virtual currency that is used by individuals and companies across the globe, including Australia. Click here if you would like to purchase Bitcoin through a trusted platform.
BITCOIN: HOW IS IT TAXED?
There are generally no taxes or GST obligations for those not operating a business or an enterprise and paying for services or goods using Bitcoin (for instance, buying personal items or services over the internet with Bitcoin).
Bitcoin is considered an asset subject to capital gains tax (CGT) asset, and therefore CGT may be applicable when an Australian resident transfers Bitcoin to another. However, transactions are not subject to capital gains tax if
Bitcoins can be used to purchase items or services that are to be used for personal purposes – e.g., Booking hotel reservations on Expedia or at a café that accepts bitcoins.
The price of bitcoins used to fund the transaction is, at most, $10,000. (this is the exclusion of personal-use assets).
If the value of the bitcoins that were used in the transaction is greater than 10,000, then the personal usage exemption will not be applicable and CGT will be applicable. Capital gains are determined by the increase in the value of bitcoins between when they were seized and when they were destroyed.
THE EXCHANGE OF BITCOINS BY TAXPAYERS (INCLUDING BITCOIN ATMS)
If you operate an enterprise of purchasing and selling bitcoins as exchange services, the proceeds earned from the sale of bitcoin will be included in your tax-deductible income. The expenses that arise in connection with an exchange program, such as the purchase of bitcoin to sell, is tax-deductible.
BITCOIN ACQUIRED FOR INVESTMENT DISPOSED OF
The rules for trading bitcoin for profit or business instead of buying and selling bitcoin for investment are identical to the rules that apply to investors versus share traders. There are additional factors to consider, but if you hold bitcoin for future growth, you will likely be an investor. If you’re buying and selling Bitcoin for a short time to make profits, you’re most likely to be trading.
If you buy bitcoin as a way to invest and you earn a profit from selling the bitcoin isn’t tax-deductible; therefore, tax deductions cannot be claimed. Capital Gains Tax applies even if the value of bitcoin is less than $10,000; however, the exemption for personal use could apply if you prove that the bitcoin was used to finance personal consumption.
If the price of the bitcoin is more than 10,000, then the personal usage exemption will not be granted, and CGT will be in effect. Capital gains are calculated by calculating the growth in the value of bitcoins in the period between when they were purchased and when they were sold.
If the transactions constitute an income-generating undertaking or plan that generates profits, the gains on selling the bitcoin will also be deemed income taxable. You will then be seen as a Bitcoin trader instead of an investor.