Investment Tax in Australia

You will have seen the terms Bitcoin or Cryptocurrency (Crypto) in all forms of media or from friends and family. The new and innovative technology, as well as its speculative nature has excited people in all walks of life. We have enlisted our trusted associates at Apollo Capital to provide brief snapshot to the question “What is Crypto?”.

Henrik Andersson, Apollo Capital CIO, writes:

“Crypto assets and blockchain technology are one of the most exciting new trends pushing the boundaries of technical innovation. Bitcoin was the first crypto asset and has become recognised as “digital gold,” due to its sharing many similar properties with gold. Ethereum is the second largest crypto asset, a general purpose blockchain that can be used to create a range of novel use cases. At the core of crypto assets is transparency, decentralisation and immutability, with Bitcoin operating as an immutable ledger validated by code and computers and not by counterparties. Ethereum and other blockchains provide platforms for smart contracts to be created and integrated with applications which again, removes counterparty risk. This new paradigm of replacing third-parties with software to empower the user is the core premise of the crypto asset industry and it is beginning to challenge traditional world applications/products. For example, Decentralised Finance is a niche are of crypto where users can borrow and lend securely and anonymously at better rates than traditional banking products. As crypto assets continue to explore and experiment with use cases, the world will continue to see the transition of products and applications that can be provided in a decentralised and transparent manner.

As an investment opportunity, crypto assets are not for the faint of heart. The technology is young and crypto asset prices are highly volatile. However, there is a strong case for a small allocation to crypto assets within a diversified portfolio. Crypto assets offer extraordinary return potential and they tend not to correlate to traditional assets like stocks and bonds.”

Apollo Capital is a Crypto Investment Fund that operates a range of investment options in the Crypto space from a capital investment fund to a market-neutral fund. Investing in Crypto is complicated and risky, so we recommend talking to professionals as opposed to taking the risk yourself. Tim Johnston is the managing director of Apollo; both Tim and Henrik are clients of Hamilton Morello.

If you are looking to invest or have invested into Digital Assets class, the question that follows next is how is all this taxed in Australia? At Hamilton Morello we have a panel of Crypto Taxation experts which can guide you through all transactions past, present and future. At the core of the asset class is a distributed ledger which is a chain of all past transactions all linked together in blocks, hence the term blockchain.

While all transactions are visible to the public and all authorities, there are no names attached to transactions, instead a wallet address. The ATO have this information from the identity verification performed by your exchange when Crypto is purchased using fiat dollars.

The Tax Implications of Owning or Trading Digital Assets

Cryptocurrency Capital Gains Tax

The first major Tax is of course “Capital Gains Tax” (CGT), like all investments made in Australia, CGT is the taxation paid on the profit made on the sale of Crypto. The amount of tax you pay will depend on the length of time owned and your personal marginal tax rate.

Capital Gain = Sale Proceeds – Cost Base

Sale Proceeds can come in the form of actual sale back to Fiat currency or even with the swap from one form of Crypto to another. This is where things can get very complicated as the time of the swap determines the Sale Proceeds received and this needs to converted to Australian Dollars to perform the Capital Gains calculation.

Some good news is that if you have held your Crypto before disposal for longer than 12 months, then there is a 50% discount applied to the Capital Gain.

If you have made a loss on your Crypto investing, then this loss can be offset against other capital gains made in the current year or be carried forward to a future year to offset against future capital gains made on any investment class. You cannot offset losses against prior year capital gains.

Cryptocurrency Sale Proceeds & Cost Base

Any Sale or Purchase of Crypto through an exchange will form your Sales Proceeds or Cost Base for that parcel.

Other parcels can be created by a Crypto to Crypto transaction. These are explained further below.

Eg. 1 Bitcoin is converted to 14 Ethereum on 1 August 2021. At this date the value of Bitcoin is $50,000 AUD.

Therefore in this case $50,000 AUD is used as the Sale Proceeds is for the sale of 1 Bitcoin and the Cost Base for the 14 Ethereum acquired.

In simple terms a CGT Asset is created when first purchased or acquired and its Cost Base will be the actual AUD paid or the market value of the CGT Asset used to acquire it.

The CGT Asset is sold or disposed of when it has been sold on an exchange for AUD or disposed of for another CGT Asset, the Sale proceeds are the AUD received or the market value at the time of disposal.

Crypto to Crypto Transactions

A common transaction is to trade one Crypto asset for another. In this case there is a disposal for CGT and a new parcel created with a new Cost Base.

As stated on the ATO website as of 5 September 2021.

“If you dispose of one cryptocurrency to acquire another cryptocurrency, you dispose of one CGT asset and acquire another CGT asset. Because you receive property instead of money in return for your cryptocurrency, the market value of the cryptocurrency you receive needs to be accounted for in Australian dollars.

If the cryptocurrency you received can’t be valued, the capital proceeds from the disposal are worked out using the market value of the cryptocurrency you disposed of at the time of the transaction.”

Crypto as a Personal Use Asset

In very limited circumstances will Crypto be considered a personal use asset and exempt from CGT. This is very simply if you have used less than $10,000 AUD worth of Crypto in a very short time span to make personal use purchases.

The ATO uses an example where the taxpayer wishes to purchase a concert ticket where the provider offers a discount if tickets are paid in Crypto. In this case the taxpayer acquires Crypto and immediately uses that Crypto to pay for the discounted tickets.

For further clarification on this fact please contact Hamilton Morello or consult the ATO website.

Loss or Theft of Crypto

You may be able to claim a loss if you have lost your private keys or Crypto is stolen. The ATO will require you keep appropriate records to support the capital loss claimed. A list of required documents to support this can be found on the ATO website.

Proceeds from “Staking” and “Airdrops”

Staking is a process of where Crypto assets are locked up in a smart contract with reward paid in Stable Coins or further Crypto. This is comparable to earning interest on a bank account. The money value of the rewards is ordinary income at the time they are derived. Tax on this ordinary income is levied at your marginal tax rate.

Airdrops are used in early adoption of a new project by way of creating new Crypto and depositing into a wallet to create awareness of a relatively new Crypto. Again, this is considered ordinary income as above with the money value of the airdrop at the time being the ordinary income.

The good news is that in both cases above, a new parcel of Crypto has been created and the Cost Base for that CGT Asset is the ordinary income at the time of acquisition.

Chain Splits or Forks

A Chain Split or a Fork is where two competing versions of the blockchain develop, both Chains share the same history at the time of the split but two separate Crypto assets exist into the future. A very well-known example of this is Bitcoin and Bitcoin Cash. The Split or the Fork creates a new CGT Asset and according to the ATO as at 5 September 2021, the Cost Base of the newly created CGT Asset is $0. If that new holding is held for longer than 12 months from the time of split, then it would be entitled to a CGT discount.

The ‘new’ Crypto at the time of the chain split is the one with different rights from the original one. In some cases, the chain split can result in the creation of two new Cryptos and the discontinuation of the original one. If this occurs, the individual incurs a capital loss on the original Crypto and holds two new Cryptos with a cost base of $0 each.

There are many more areas of Crypto and Tax in Australia which are all relevant. These include but not limited to:

  • running a business with Crypto as the currency of choice;
  • earning salary and wages in Crypto;
  • wrapping Crypto;
  • receiving gifts of Crypto; and
  • so much more.

There is also the ability to invest in Crypto via an SMSF, this comes with a raft of other rules that need to be followed on top of the tax consequences listed above. If you or anyone you know has a specific question in relation to any items in this article or others not listed specifically, please contact the team at Hamilton Morello for more information on the matter.

Written by Mark Porta of Hamilton Morello 15 September 2021.

Disclaimer: This article is for information purposes only. It should not be used as the basis for making any financial or other decisions.