Australian Taxation Laws and Cryptocurrency – Part 2

In part 1 I spoke about two of the three types of taxes on cryptocurrency and their uses, Personal Use Assets and Cryptocurrency as an Investment. In Part 2 I want to briefly look at how the ATO deals with businesses dealing in, and with, cryptocurrency. The ATO breaks down cryptocurrency with regards to business into three different categories: Cryptocurrency Businesses, Using Cryptocurrency for Business Transactions and Paying Salary or Wages in Cryptocurrency. I want to use this blog post to briefly explain what each of these things mean in a way that is easy to understand for both employers and employees affected by them (whether currently or in the future).

Cryptocurrency Businesses

For this part it refers to how holding cryptocurrency for trade or exchange in the normal operations of business then trading stock rules apply, trading stock refers to anything you buy for use in the operation of running your business. An example would be if you own a coffee shop, coffee beans would be considered trading stock since it is the backbone of your business. On the other hand the computer that you use to take sales would not be considered trading stock and would instead be considered a business expense. Once you sell trading stock (in this case cryptocurrency) it is taxed as ordinary income to the business except you are able to deduct the cost of acquiring the trading stock (this essentially means that you are only paying tax on the profit you made on selling the trading stock).

It then goes on to explain what the difference between acquiring cryptocurrency for use in a business Vs. for personal use/as an investment is. These differences include, but are not limited to:

  1. Carrying on activity for commercial reasons or in a commercially viable way
    1. This, although rather vague, is in most cases interpreted to mean dealing with third parties, this could include having suppliers of cryptocurrency, having a network of people you sell to and promoting the services you provide amongst various other activities.
  2. Undertake activities in a business-like manner
    1. This refers to any business related activities such as preparing a business plan and acquiring assets (cryptocurrency) in line with the business plan, or generating various cash flow sheets such as a cash flow statement or a balance sheet.
  3. Prepare accounting records and market a business name or product
    1. Emphasis on Marketing a business name or product, that is very closely linked with the first point.
  4. Intend to make a profit or genuinely believe you will make a profit.
    1. Using the coffee shop example again, when you first set up your business it is unlikely you will begin to make any profit for a significant amount of time because of factors such as a lack of goodwill (listed as an asset on balance sheets which gives a dollar value to loyalty, awareness and perception of the brand) associated with the business or because of external factors such as competition. Just because you don’t make a profit initially does not mean you aren’t running a business, even if your business plan involves making a profit.

This is followed by something that the ATO puts into pretty much all business related taxation pages, it essentially says that there is usually repetition or regularity to business activities, but one off transactions can amount to conducting business in some cases. The vast majority of cases taken up on this basis by the ATO in court end up being a loss to them because it is extremely difficult to establish that somebody is running a business if it only happened once. The major point that they get people on in this section is when you promote the “business” in some way or another. Of course there are many other ways to prove that somebody was conducting business and it is best to be honest in the event you were disposing of cryptocurrency in the capacity of a business.

The last point in this category is about how money, or property (crypto), received prior to business being carried on is not generally assessable income, this means that if you haven’t started the business yet the the disposal of the crypto will fall under the CGT or in the case of a personal use asset worth less than $10,000AU will not be subject to any kind of tax. On the flip side, you cannot claim deductions incurred prior to business being carried on. This means that if you have already bought a bunch of hardware for mining cryptocurrencies and then 6 months later decide you want to get into business, you cannot claim the hardware you bought as a business related expense to reduce the tax you need to pay on it.

Using Cryptocurrency for Business Transactions

This refers to any business that deals with cryptocurrency in any activity, but is not a cryptocurrency business. The ATO says that if a business carries on any activity that deals with cryptocurrency then it needs to be accounted for as you would for any other asset, this includes things such as listing cryptocurrencies as separate assets on a balance sheet and submitting information on said assets to the ATO.

A barter transaction refers to any transaction where goods are being exchanged rather than a good for fiat currency. If a business sells a good or service in exchange for cryptocurrency then this is considered a barter transaction and the expectation for barter transactions is that the business needs to include the value of the goods received (cryptocurrency) in Australian dollars as part of their ordinary income. The proper way of determining the value of cryptocurrency in Australian dollars is using the fair market value, which in this case, can be obtained from any reputable cryptocurrency exchange

If you use this cryptocurrency to acquire business items (including trading stock), then you are entitled to a deduction based on the value of what you bought. Using the coffee shop example again, if I bought 10kg of coffee beans using cash I would be entitled to deductions on the amount of tax I pay acquiring those goods, the above section means that I could also use cryptocurrency to purchase those goods, and still receive the same deductions.

Paying Salary or Wages in Cryptocurrency

When an employee has a salary sacrifice arrangement (this refers to sacrificing part of your salary or wage to be put towards something else such as a child’s education, a car and all expenses associated with it, etc.) with their employer to receive cryptocurrency as part of their salary/wage instead of Australian dollars, the payment of the cryptocurrency is a fringe benefit and and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act 1986. The fringe benefits tax act was introduced because people, usually in higher paying jobs, where making agreements with their employers to decrease their salary and have the remainder paid to them through goods or services in order to avoid higher tax brackets so the ATO introduced the act to tax employers based on the amount that is being paid through goods or services. The amount of fringe benefit tax that needs to be paid changes depending on which tax bracket you would be apart of as if you received the entire salary in Australian dollars and employers must submit information quarterly with the details of any salary sacrifice agreements within the business.

The next paragraph is a bit of an interesting one and reads: “The benefit will be a property benefit whose value is established at the time of provision of the benefit.” This looks complicated and had me scratching my head for some time until I realise it simply means that the value of the property (cryptocurrency) is defined by the market value of the cryptocurrency at the time the employee receives it in Australian dollars and that its value at the time it is given to the employee is the amount it should be valued at when submitting the quarterly return to the ATO for fringe benefits.

The final paragraph talks about any scenario where cryptocurrency is received as a form of remuneration (payment for work) where there is an absence of a valid salary sacrifice agreement. It says that in the event en employee receives property or other services (in this case cryptocurrency) the employer will need to meet the pay as you go obligations on the Australian dollar value of the cryptocurrency it pays to the employee (employer takes out what ever the tax amount is for the full amount paid to the employee as if it was all paid in Australian dollars). For once the ATO actually decides to explain what this means by providing their own example. They describe an example being where an employee has already earned their salary or wages and then asks to have some/all of it paid in cryptocurrency instead. The main difference from a salary sacrifice agreement is the nature of when the request/agreement was made. One (salary sacrifice agreement) was made at the start of the year/beginning of a contract (pre-existing arrangement), while this scenario refers to receiving cryptocurrency after the work you are being paid for has been done.

Full document on the ATO website is available here: https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?page=3#Cryptocurrency_used_in_business

If you have any questions you can contact me on Twitter @taterobinson4

Please keep in mind this is a general and broad overview of taxation regulations in Australia that has been simplified for easy understanding. If you are affected by any of the issues mentioned in this article and are unsure of the proper course of action please consult professional legal advice.

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Australian Taxation Laws and Cryptocurrency – Part 1

This is part 1 of 2 where I want to go into a bit of detail on how the Australian taxation office is dealing with Cryptocurrencies through the CGT (Capital Gains Tax).

What is CGT?

Although I have linked the definition above since the whole idea of these posts is to explain these concepts in a much more simplified manner I will give you a brief overview myself. Capital Gains Tax refers to the amount of capital (money) you make when selling something you bought compared to the time of purchase. An easy to understand example would be if you bought shares in a company, if you bought amount x for $5,000 and then 6 months later sold them for $10,000 then that increase $5,000 would be subject to the Capital Gains Tax. This also works the opposite way. Using the same example if you had 500 shares in company x that you bought for $5,000 and then sold them 6 months later for $4,000 but you also bought 500 shares in company y for $5,000 which after 8 months were sold $6,000 then you wouldn’t need to pay CGT because the two balanced each other out. Note that losses carry over the financial year while taxes must be paid on the gains yearly.

Australia’s Taxation Laws for Cryptocurrency

A CGT event (with regards to cryptocurrency) occurs when you dispose of that currency. Types of disposal include:

  1. Selling the cryptocurrency
  2. Sending it as a gift
  3. Trading or exchanging cryptocurrency (mostly focusing on exchanging one type for another i.e Bitcoin for Ethereum)
  4. Exchange to fiat (legal tender/cash) currency
  5. To purchase goods or services

It is also important to note before I jump in that each type of cryptocurrency is a separate CGT asset and should be treated as separate items when filling out relevant tax forms.

Both selling and trading cryptocurrencies are relatively simple, in the case of a basic sale any profit you make from the sale of the cryptocurrency is subject to CGT. Trading cryptocurrencies is a little more complicated because it compares the current value of the cryptocurrency you are receiving against how much you paid for the cryptocurrency you are exchanging at the time you first bought it (in the event you don’t have access to how much it cost you then you refer to the market value at the time of purchase). An important note here is that cryptocurrencies will often be referred to as a type of property, this is because they are not considered a currency as they aren’t bound to a certain country (honestly this had me scratching my head for so long wondering how you were meant to live in a bunch of numbers on a computer). Im pretty iffy on this bit, neither my dad or myself could really work out what it meant (my dad practiced law for more than 25 years although this wasn’t his specialty he does have a good understanding of what the complicated wording means).

If you purchase cryptocurrency as an investment you may have to pay taxes upon disposal of that crypto. It is important to note that no matter how much the base cost of the relevant currency changes you have not made a gain or loss until you dispose of it. The only major difference for investments is the “12 month rule” (genius naming by me) on investments. Since investments are often long term the taxation office used to have to take into account inflation when calculating the gains earned for the CGT. Again using the previous example if you bought $5,000 worth of crypto and sold it for $10,000 after 5 years inflation may have played a part so that $5,000 5 years ago is now the same as $5,500. This means you would only pay CGT on $4,500 instead of $5,000. Since this became so difficult to calculate they decided to introduce rules that says if you keep an investment for more than 12 months you only need to pay CGT on 50% of the gains, so in this case where you spent $5,000 and sold for $10,000 only $2,500 would be subject to CGT. It is important to note (how many times I have I written those three words now) that if you want to be eligible for this reduction in CGT on an investment you need to have the investment listed under your own name.

To classify cryptocurrency as a personal use asset both the period of holding and the nature of the transaction (disposal) are taken into account. Because of this a crypto asset can not be determined as a personal asset or not until the time of disposal (note that the longer an asset is kept the less likely it will be considered a personal use asset). The ATO (Australian Taxation Office) says that cryptocurrency can not be considered a personal use asset if it is acquired, kept or used:

  1. As an investment
  2. In part of a money-making scheme
  3. In the course of carrying on business (crypto in business is talked about in Part 2)

The ATO also states that changing cryptocurrency into Australian dollars to use on purchases for personal use or consumption is seen as a strong indication that the cryptocurrency was not acquired, held and used as a personal use asset. However if you use the crypto to buy a good without first exchanging it for money or other cryptocurrencies and also meets some of the above listed criteria it can be considered a personal use asset. The most interesting part of this section is mentioned right at the end of the personal use asset subheading. it says:

Only capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded.

You may recall earlier when talking about CGT how I mentioned both gains and losses and how they counter one another. This is essentially saying that if you have cryptocurrency as a personal use asset that is worth (at the time of purchase) more than $10,000 (AU) you will still have to pay CGT on it, however if you purchased $10,000 worth of cryptocurrency for Personal use and make a loss on it, your capital losses, which you would normally be able to use later to help counter capital gains, is lost (ahaha lost the losses, God I’m funny).

Here is the full page from the ATO on CGT and cryptocurrency: https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia—specifically-bitcoin/?page=2#Transacting_with_cryptocurrency

If you have any questions I am more than happy to help to the extent I can on Twitter @taterobinson4.

Please keep in mind this is just a general overview of legal regulations surrounding cryptocurrencies. If you are affected and unsure about any of these issues it is best to seek professional advice or consult the official documents linked in each post.