Cryptocurrency investors are being warned they must declare any earnings on their investments in their tax returns, or face the consequences.
The 2017-18 financial year, which ends on June 30, saw an incredible explosion in the value of cryptocurrencies like Bitcoin, Litecoin and Ethereum.
And while the stunning surge in December proved to be a bubble, the major cryptocurrencies are still worth significantly more than they were on 1 July last year, the first day of the current financial year.
Bitcoin, for example, was worth just $US2560 ($3427) on July 1, 2017. As of Friday, June 15, it was worth $US6306 ($8441).
While that’s massively down on its December peak of $US19,186 ($25,684), it still represents a considerable gain of 146 per cent.
As far as capital gains go, that is absolutely enormous.
So if you bought $1000 worth of Bitcoin on July 1, 2017, your investment would now be worth around $2400. If you sold your Bitcoin investments today, it would have made a capital gain worth $1400.
That’s $1400 of income you will need to declare to the Australian Tax Office (ATO) as part of your total income.
If you bought your Bitcoin on July 1 and sold it at the peak of the bubble, you would have made a capital gain of about 650 per cent. On an investment of $1000, that represents a capital gain of $6500 that you must declare to the ATO.
It’s important to note, however, that if you have not sold your Bitcoin, the ATO does not count it as income, and you don’t have to include any gains on your tax return.
Liz Russell, senior tax agent at Etax.com.au, said the ATO was on a “warpath” with cryptocurrency investors, and would be “doubling down with its data-matching technology to ensure that Australians are paying any taxes owed through cryptocurrency trading”.
“It’s important to know how the ATO classifies cryptocurrency, as this determines how it’s treated for taxation purposes. There is a long-running debate over what cryptocurrency actually is – whether it’s an asset, currency or collectible – but the ATO has made it clear that it treats cryptocurrency as an asset.”
That, she said, meant it is subject to the same capital-gains tax provisions that apply to real estate and shares.
She pointed out that, while the ATO may struggle to track the movement of cryptocurrencies themselves, as soon as you cash in your cryptocurrency, the ATO can track it.
In other words, if you do not declare any realised gains from a cryptocurrency investment, the ATO will probably find out.
“Let’s say you originally bought $5000 worth of XEM, which is one of the lesser-known coins consistently in the top 10 of cryptocurrency market caps.
“If you later traded it for fiat currency of $8500, then the $3500 in profit is considered a capital gain, and you’ll need to add it to your assessable income for the financial year – much like you would any gains you make the sale of shares or an investment property,” Ms Russell said.
However, she also pointed out that if you traded cryptocurrency at a loss – as many people who bought at the peak of the bubble in December and January will have done – those losses can be deducted from other capital gains, and therefore reduce your tax bill.
“For example if you made a $3000 loss on the sale of cryptocurrency but a $4000 gain on the sale of shares, your net capital gain would be the $4000 gain minus the $3000 loss, equalling a $1000 capital gain,” Ms Russell said.
The ATO has a very detailed page dedicated to the tax treatment of cryptocurrencies, which you can read here.