Tax Planning

Tax on Bitcoin and Cryptocurrency

I'd like to clarify some thoughts around the tax on Bitcoin and cryptocurrency profits.

Background of Bitcoin and Cryptocurrency

Bitcoin has sometimes been referred to as the ‘currency of the underworld’. But whatever your view, it is likely that the currencies of the future will be cryptocurrencies.
This topic is fairly controversial, especially in the last sort of four or five months when Bitcoin shot through the roof (December 2017). This has lead onto more focus in the media, and an increase of conversations that we've had with our clients about the subject.
Bitcoin has been around since January 2009, and is a type of virtual currency. You might have heard the word cryptocurrency, which Bitcoin is one example of. But there's lots and lots of other cryptocurrencies as well now that have come out since Bitcoin. There’s literally hundreds of them, if not thousands, and more and more people are working on developing their own cryptocurrency.
Here’s a list of the top ones by market capital: coinmarketcap.com
There's people on both sides of the fence: some saying, "You're going to lose all your money." But on the other hand, there's people making millions of dollars.
In the end, there's people out there making money and there's people out there losing money. But that's not the point of what we're here to talk about – go and rant on Facebook about that.
We're here to talk about the tax effects, and what you need to consider from a tax perspective.

Tax on Bitcoin and Cryptocurrencies

I might pre-empt this by mentioning I actually bought and sold some cryptocurrency. But in no way am I a trader and I'm making millions of dollars from this. I actually put some money into it, so I could see how the crypto-world works, and how you actually buy and sell these currencies, and transact in them.
Now the first thing to consider is the ATO haven't been very public on their opinion and recommendations in great detail on cryptocurrency. The ATO have released some materials on it though. There's forums that the ATO hosts where people have asked lots and lots of questions, and they haven't really got great or any answers.
But they have set some guidelines to cryptocurrency that you do need to consider. If you ignore them, and you're caught out, then there will be massive penalties and fines, because that could be seen as tax evasion, or tax avoidance. People end up in jail for that sort of thing. We're not here to ignore the fact that you're making profits in Bitcoin or cryptocurrency, and so we need to address it.

Bitcoin and cryptocurrency as a Capital Gains Tax Asset

Firstly, the ATO see cryptocurrency as a CGT asset, or Capital Gains Tax asset. That generally means that you're buying an asset to sell it later for a gain. You're not necessarily making a business of it let's say.
It’s kind of similar the ATO seeing gold bars, an investment property or even shares held on the Australian Stock Exchange as capital gains tax assets.
If you buy, let's say $50,000 worth of Commonwealth Bank shares, and you sell them 10 years later for $100,000, you make a $50,000 gain on them. That's called a capital gain. The ATO wants their cut, called capital gains tax.
You may also know about the capital gains tax discount, where if you are in an asset for more than 12 months, then you receive a 50% discount on the tax payable on that gain.
Let's go back to the CBA shares, where if you buy them for $50,000, 10 years later you sell them for $100,000, then instead of paying tax on $50,000, you'll pay tax on a $25,000 discounted gain.
Now what the ATO has said about cryptocurrency, is yes, they might consider your investment as a capital gain, and be able to give you that 50% discount, if you bought it over a year ago before you sold it.
But you need to be very careful, because they've also said that people who actively trade in Bitcoin or cryptocurrencies will be taxed as if that income was business profits.
In that case, you won't actually get a 50% discount, even if you own that currency for more than 12 months.
Now from the people I've spoken to, there's kind of two types of crypto investors:

1. Tax for Passive Bitcoin and Cryptocurrency Investors

There's ones who were lucky enough to buy, let's say Bitcoin for a couple of cents, or a couple of dollars back in the very early days. Now their portfolios are worth tens of, or hundreds of thousands of dollars, or even millions of dollars.
But they would've whacked a few dollars on it years and years ago. They woke up all of a sudden, and bam they've got massive portfolio worth of Bitcoin.
Now had you not traded that stuff day-to-day, week to week, or even month to month, the ATO might actually consider you're eligible for that 50% capital gains tax discount.
That's the first type of investor, which is very passive, and you're not too involved. You're not logging in each day, and checking the price, and making regular decisions based on that.
But let's say you are that person who, you might have got into it early. You might have even gotten into cryptocurrency recently, but you're trading it quite actively. Read on…

2. Tax for Active Bitcoin and Cryptocurrency Traders

Trading it ‘actively’ could even be making a few trades every week or month.
Now what I've seen with most of the traders who go about this to make profit (and it might be literally a part-time, or even a full-time job they're doing trading cryptocurrency) is that in my opinion, and even the ATO's opinion, it is actually considered business income.
So it wouldn't be seen as capital gains for those investors. They wouldn't receive that 50% discount, even if it's held more than 12 months.
Now another point to mention is, I don't believe not having access to the discount matters so much for these sort of traders, because they're usually making trades and buying and selling on shorter than 12 month turnarounds anyway.
They might buy a coin for let's say 1,000 bucks. Then a couple weeks, a couple of months later, they'll sell all or some, to capture their profit.
Now even if that was capital gains, you would've paid tax on the full gain (without a discount).
But if we're realising it as business profits, you're still going to pay tax on the full amount anyway.

Using business structures to trade Bitcoin and Cryptocurrencies

Now that brings into consideration the ability to use business structures. Our biggest strategy to control how much tax you pay.
The first thing to consider is that the tax rate of each structure.
  1. Sole Trader: If you buy and sell bitcoin or cryptocurrencies in your own name, you can be taxed at the highest marginal tax rate of 47% tax.
  2. Companies: Or if you run your business through a company, you can pay tax at either 27.5% or 30% tax, depending on your turnover.
  3. Trusts: if you structure it through a trust, you basically distribute profit from that trust to family members, or other entities (like other companies) in your family group.
Unfortunately, I think most people started out with cryptocurrency as a sole trader - a little bit of a thing they do on the side. It may have actually turned into a highly profitable business. Just watch you’re not going to forever give 47% of what you make to the tax man.
A big thing to consider is what business structure you trade through. Now if you're thinking this, and you've already made a decent amount of money already through cryptocurrency, we can't go and retrospectively implement these things. But I'd definitely consider changing your structure moving forward. Especially if you're going to continue making those profits moving forward.
Now the difficulty we get is it's actually quite hard to get a designated company or trust account with a lot of these cryptocurrency exchanges. (Where you buy the coins.)
One thing you need to do is consider, "Well, I might want to structure through a company or a trust, but how to actually do that, when I can only signup for these things in my own name?"
This is why I intentionally went through the process of buying coins, and signing up for stuff – and this is one of the brick walls I hit and have since overcome.
There may be ways to achieve by signing up in your own name, buy running the profits through a company or trust – where you act on behalf of the company or trust.
As an example, if you are successful in running your trading through a company, then on your profits you'll be paying tax at a flat rate of 27.5%, instead of up to 47% tax that you'll pay if you do it in your own name.
I'd encourage you to reach out to us so we can have a chat about your situation, and see whether one of these options would be available to you.

Record keeping of Bitcoin and Cryptocurrency trading

The other really important thing to keep in mind when you're trading the cryptocurrency, or buying and selling, is make sure that you have records. Now, done a few trades, I’ve found it's really, really difficult to keep track of it, given the prices change so much. You might be converting AUD -> BTC, then BTC -> some other random coin -> and so on.
There's also no real central exchange or platform that you buy and sell coins from either. If you're trading more than just Bitcoins, like Bitcoin and Ethereum, or whatever, some of the other big ones, there might not be just one exchange or place that you trade them.
But you might have signed up to three, four, five, or six exchanges and be buying and selling them from many different places. (Or even peer to peer trades with some of the smaller coins.)
The critical thing is to make sure you've got a way of systematically keeping a track of your profits. Now, I'd hope you're doing this in any case to make sure you are making money, but on the other hand, the tax man will want to see how you come up with your calculations of profit.
Now, there are some websites that you can use to keep track of this for you. There's been mixed feedback on them, but CoinTracking.info has a fairly decent way of reporting your trades and keeping track of your values.
If you're making tens of trades a day, you probably want a way that automatically keeps track of your trades for you. I don't know any at the moment, so if you know of any let me know in the comments below.
There's a bit of background on tax on Bitcoin and cryptocurrency. I hope that's been helpful, and please let me know if you have any other questions.