New rules capture SMSFs trading big with cryptocurrency
Sizeable cryptocurrency transactions will “come to the attention of the ATO” under new rules that came into effect this week, so a mid-tier firm has put together a checklist of key considerations to keep SMSF investors compliant.
As of today, all cryptocurrency exchanges must be signed up to a new Digital Currency Exchange Register. Transactions exceeding $10,000 must also be reported to AUSTRAC to meet existing rules for bank transfers and cash transactions.
“People will need to be ready to explain not only where the money came from, but also to show that they have followed the ATO’s rules,” said partner at HLB Mann Judd, Peter Bembrick.
“A critical aspect for an SMSF’s compliance is having the right documentation to establish that the investment has been made by the fund, as well as keeping track of the market value annually and recording disposals, gains and losses,” Mr Bembrick told SMSF Adviser.
Ignorance of the tax-related consequences of cryptocurrency exchanges is not adequate defence, particularly given the very public campaigning of the ATO about cryptocurrency in the lead up to tax time.
“There are a number of areas that may catch people by surprise, if they haven’t done their research. It’s never a good idea to fall foul of the ATO and, as always, ignorance of the rules is not considered an adequate defence for failing to pay the appropriate tax.”
Mr Bembrick prepared a checklist for professionals with clients who hold cryptocurrency, as follows:
The tax implications of mining cryptocurrency
Generally speaking, the ATO would treat activities to acquire cryptocurrency by mining additional units as a business, and the value of units acquired would be assessable income in the year of acquisition.
“On the assumption that the cryptocurrency units are treated as either trading stock or CGT assets, however, then any further unrealised increased in the value of units held will not be taxable until they are eventually realised on a later disposal,” Mr Bembrick said.
“In addition, if there are direct costs such as electricity or the depreciation of equipment dedicated to cryptocurrency mining activities, these should be tax deductible against the income received from the cryptocurrency mining business,” he said.
Claiming a personal use exemption
The ATO will accept that cryptocurrency is a personal use asset if it can be shown that it was acquired purely to hold and then exchange for other goods and services, and not with the intention of making a profit or in the course of carrying on a business, Mr Bembrick said.
A personal use asset — with examples including a car, boat or holiday home — is exempt from CGT if it costs less than $10,000.
“However, the question of intention can be quite subjective and is not always so easy to prove,” Mr Bembrick said.
Tax payable if someone is paid using cryptocurrency
Contrary to some client chatter, if someone is paid in cryptocurrency for goods or services they provide in the course of carrying on a business, this payment is still taxable.
“The ATO views this in just the same way as being paid with other goods or services, that is, as a form of barter arrangement. The taxable amount is the AUD value of the non-cash consideration for the goods or services at the time of the transaction,” Mr Bembrick said.
“Similarly, if cryptocurrency is used to pay for goods and services in the course of carrying on a business, the AUD value of the payment would be treated for tax purposes in the same way as if you had paid the equivalent amount in cash,” he said.
Capital gains tax
As the ATO indicated in its guidance note last year, there is a taxable capital gain when a cryptocurrency unit is sold for more than the purchase price, and a capital loss when it is sold for less than originally paid.
“The capital gain or loss needs to be recorded on the personal tax records, just as any other investment such as shares,” Mr Bembrick said.
“For Australian residents who have held the cryptocurrency for at least 12 months, a 50 per cent CGT discount can be claimed, meaning they only pay CGT on half of the actual gain,” he added.
Further, it’s important clients are aware of the difference between investor and trader for tax purposes.
“Just like other investments, be aware that the ATO may treat some investors as a trader or speculator. This means that, if the purpose of buying and selling cryptocurrency was for short-term profit rather than long-term capital growth, then any gains would simply be taxed as personal income, without any access to the CGT discount and without the ability to offset any capital losses from other investments against the cryptocurrency gains,” Mr Bembrick said.
“The only good news is that trading losses can be offset against other types of income,” he added.
Not a currency
Cryptocurrency, such as bitcoin, is not a currency, but rather is treated as an asset for tax purposes.
Consequently, the price in Australian dollars will change over time, which is important because it means that there are tax consequences from the purchase or sale of a unit of cryptocurrency.
“As with other investments, the exact nature of the tax implications will depend on the taxpayer’s related activities as well as their intention when they acquired the cryptocurrency,” Mr Bembrick said.
By: Katarina Taurian
03 APRIL 2018
www.smsfadviser.com
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
- Millions of Australians lose by leaving savings in default MySuper funds
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
April - June 2018 archive
- Assess your retirement financial resources
- Cryptocurrency audits tipped to increase this EOFY
- Time to check your risk exposure?
- Some general interest stats on SMSFs
- Survey reveals strong opposition to retirement system changes
- Check trust deed to protect super in estate planning
- Australia by numbers – Update
- Federal Budget 2018 – Overview
- Your Budget
- 4 components of our 2018 Federal Budget
- Tools to help you manage your financial position are available on our site.
- New rules capture SMSFs trading big with cryptocurrency
- Common EOFY slip-ups flagged for SMSFs
- Beware residency rules if moving overseas
- 99 pct of SMSFs missing global opportunities
- How to plan for a better retirement
- Australia by numbers - Update
- Determine your retirement goals
- ATO issues update on cryptocurrency compliance traps
- How likely is a global trade war?
- Gig economy spike prompts calls for super policy changes
- Australia's vital statistics
- What your age should say about your super
- Downsizing requires holistic tax planning
- Millions of multiple super accounts erode savings