Crypto Investing Basics - Bitcoin and Tax in Australia (Part One)

How will my crypto currency gains and losses be treated by the Australian Tax Office (ATO).

I have seen a lot of discussion about crypto currencies and tax in various blog posts on Steemit. Most of these have dealt with the American tax system, so in this article I hope to outline the implications of crypto currencies and tax as they are relevant to Australian citizens. I am attempting to write an article that is of use to those who want to declare their crypto earnings and pay the appropriate amount of tax. As such I won’t be suggesting any ways to “dodge” tax. There are any number of ways to try and avoid detection by the ATO and thus avoid tax. I will be steering clear of these issues. That said, I will suggest a number of ways that may enable you to legally minimise your tax bill.

Originally I had only intended to write a single post on this issue, but as I have been working on it, it has grown in size. I will instead spread it across three separate posts to attempt to keep each post manageable in size, and more reader friendly. This article will deal with some taxation basics as they relate to crypto currencies and the use of bitcoin as a medium of exchange, including the potential implications on using services like Living Room of Satoshi. In the next article I will cover taxation as it relates to investment gains and losses, and in the final article I will suggest some ways in which you may be able to legally minimise any debt you owe to the tax office.

My background to write this post

My professional occupation requires me to deal with tax regulations on an almost daily basis. I am registered with the Australian Tax Practitioners Board to give advice in relation to tax and investments. That said, I am not an accountant. Tax Law is extremely complicated, and your tax obligations depend almost entirely on your personal circumstances. For detailed tax advice you need to consult a registered tax accountant. The purpose of this blog is not to provide detailed tax advice to those that read it. It is merely intended to provide general knowledge to allow you to have a greater understanding of the tax consequences of investing in crypto currencies. By way of quality assurance, my wife also holds a Masters of Professional Accounting, and she has reviewed the contents of this post and agrees with the interpretations that it contains. Please note that she is also not a registered tax accountant, therefore I need to reiterate that for personal advice on your individual circumstances, you would need to consult with a registered accountant.

The ATO’s view of crypto currencies

There is a reasonable amount of information on the ATO website that deals with taxation and crypto currencies. The ATO documentation refers almost exclusively to bitcoin, however I have chosen to treat the terms of “bitcoin” and “crypto currency” interchangeably in relation to the way in which the ATO views these assets. In other words, where the ATO makes specific reference to bitcoin, you could insert any other type of crypto currency and the interpretation would be the same.

The link to the ATO’s guidance paper is shown here.

https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/

The ATO covers a number of different issues in relation to crypto currency investment, speculation and other areas. I will deal exclusively with two areas these being:

• bitcoin as a personal use asset

• bitcoin as an investment

The ATO also provides guidance for bitcoin miners, and for those who are using bitcoin in the course of carrying on a business. These topics are outside the scope of this article.

Bitcoin as a personal use asset

The term ‘personal use asset‘ is quite important in relation to Bitcoin. A personal use asset is, exactly as the title implies, an asset that you acquire for personal use. It is not an asset that you acquire with the expectation of making a of profit or loss. Things such as televisions, iPads, motor vehicles and personal computers would all be considered personal use assets. The ATO allows you to exclude the purchase and sale of personal use assets when calculating your taxable income. This is important because in certain specific circumstances the ATO will allow you to treat Bitcoin as a personal use asset, and therefore you will be exempt from taxation on Bitcoin in those circumstances.

The ATO guidance papers states

Where you use bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the bitcoin will be disregarded (as a personal use asset) provided the cost of the bitcoin is $10,000 or less.

I have had tax discussions with a number of members of the crypto community, and some have indicated that they believe this to mean that provided you make purchases of less than $10,000, then the bitcoin or other crypto with which that purchase is made is exempt from taxation. I believe this to be a misinterpretation of this tax guidance. The easiest way to demonstrate this is to use an analogy.

Imagine I was to travel to Europe on vacation, and was to convert Australian dollars into British pounds prior to leaving on my holiday. If upon return from holidays I had not spent all of my money, I would be able to re-convert those British pounds into Australian dollars. If whilst I was on holidays, the value of the British pound had risen and I had made a gain on the exchange rate, then this gain is exempted by the tax office, and I’m not required to pay tax on. This is how to view personal use transactions in relation to crypto currencies. The key here is that I bought British pounds in order to use them for personal use, not with the expectation that I would make a profit on the exchange rate.

To be more specific, if you purchase bitcoin or other currencies purely for the purpose of using them as a medium of exchange to purchase goods and services, then you are able to disregard any gain or loss made on those purchases as a result of fluctuations in exchange rates. This is very distinct from purchasing bitcoin as an investment. The interpretation of the above guidance from the ATO has some interesting consequences. It is my opinion (and it is an opinion only) that if you purchased some bitcoin at some time in the past, as long as the total value of that purchase was below $10,000, AND you use that bitcoin exclusively for the purchase of goods and services then you are legally exempt from paying tax on these transactions.

This has some interesting implications if you have only made one or two transactions in crypto currency. You could conceivably have purchased $1,000 worth of bitcoin in 2010, which would now be worth many millions of dollars. Provided you spend this money purely for personal use, then your entire gain could potentially be tax exempt. Very few crypto investors would fall into this category however.

If the ATO forms the opinion that you have purchased crypto for investment purposes, then you will be subject to capital gains tax and the above exemption will not apply. As there is no specific line between a transaction under $10,000 purchased purely for personal use, and a transaction under $10,000 that has been purchased as an investment, the ATO will attempt to look at the pattern of behaviour in your crypto currency transactions.

What does pattern of behaviour mean?

If you, like me, have over time made numerous transactions, in multiple different currencies, then the pattern of behaviour would suggest that you are not purchasing the currency for personal use, but are purchasing it as an investment. This may seem a little bit fuzzy, but in reality, I think it’s quite clear. If the ATO believes that based on your pattern of behaviour, you are an investor then they will tax you as one, regardless of whether you claim to be one or otherwise. Conversely if you wish to be treated under the personal use exemption outlined above, you would need to be able to demonstrate from your pattern of behaviour, that you are not trading in crypto currency with the intention of making a profit. This sounds complicated, but if you consider your own situation you should be able to figure it out. I would suggest that you don’t try to be too cute in relation to the way that you frame these things. The ATO will assess you based on their opinion, and not your own, so I would encourage you to err on the side of caution.

Important points to consider

There are some other important points to consider in relation to attempting to claim Bitcoin is a personal use asset. The ATO guidance states:

..you simply pay for goods or services in bitcoin (for example, acquiring personal goods or services on the internet using bitcoin).

A strict interpretation of this would mean that you would need to physically acquire an asset in exchange for your bitcoin. I interpret this to mean you would need to have purchased that asset from a business that accepts bitcoin as a means of payment. I will illustrate with another example.

I recently saw a BMW drive past me in Brisbane with the number plate ‘BITCOIN.’ I suspect that the driver of the vehicle had been an early investor in bitcoin, had made a decent profit, had sold some of this bitcoin and splashed out on a fancy car. Assuming he met the other requirements for personal use, then if he had been out to convince the BMW dealership to accept bitcoin in lieu of Australian dollars as payment for his vehicle, then I believe he may be a claim the personal use exemption and be exempt from any tax on the profit he made from his initial bitcoin investment. I suspect, however, that what he actually did was sell bitcoin on a bitcoin exchange, turn it into Australian dollars, and then use those dollars to purchase the vehicle. This does not strictly fall into the definition as shown above and therefore this individual may be liable for capital gains tax on any profits that he made from his initial bitcoin investment.

My interpretation of the above tax office guidance is that you must have physically paid for something in crypto currency to be able to claim this exemption from tax. You must have actually used the crypto as a currency. Conversion into fiat and then purchasing goods and services, regardless of what they are, may not meet the criteria. This is an area where I emphasise that I’m not a registered tax accountant, and that therefore it would be wise to consult with one if you felt that this is an issue that may affect you.

I have given some considerable thought to the implications of the use of Living Room of Satoshi (LROS) in this regard. Technically when you use LROS, you are not actually paying for services with crypto, you are sending the crypto to an intermediary, who is converting it to dollars and then using those dollars to pay your bill. I will put my hand up on this one and state that I don’t know how this would be treated. I suspect that the tax office doesn’t know either because I doubt they have given it any consideration yet. This is one of the joys of operating in a newly emerging area of finance.

To summarise my assessment of the personal use tax exemption for Bitcoin and other crypto currencies I would suggest that:

• The original purchase price of the crypto currency in question must have been less than $10,000. This could potentially involve several purchases up to the $10,000 limit.

• The goods and services which you purchase with these funds must be paid for directly in crypto. As stated this is my opinion only, based on an interpretation of the ATO’s guidance, however I think if you took this approach you would be relatively safe.

• You must not have a pattern of transactions that demonstrate that you are speculating or otherwise investing in crypto currencies. I think this is the point that will rule most of us out of using this exemption. If you are actively trading, as I am, then I think it would be very difficult to convince the ATO that you were buying the crypto for personal use only.

This is the first article in what is likely to be three covering the tax implications of purchasing crypto currency assets. In the next I will cover taxation as it relates to investment gains and losses, and in the final article I will suggest some ways in which you may be able to legally minimise any debt you owe to the tax office.

This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information. The material contained in this document is based on information received in good faith from sources within the market, and on our understanding of legislation and Government press releases at the date of publication, which are believed to be reliable and accurate. Opinions constitute our judgement at the time of issue and are subject to change.

Written with StackEdit.