Thanks to its ability to rise and fall in value by outrageous amounts each day, by now you have no-doubt heard about the world of cryptocurrency and the financial successes and failures it can cause investors.
This quirky little financial product causes equal debate amongst would-be investors at backyard BBQs as it does amongst governments and international financial regulatory bodies.
Its new, it’s exciting, its shiny and it can make you a lot of money. Or so many investors think. The truth is though, this quirky currency has been around for years and is built on a huge digital platform.
2021 saw cryptocurrency break many barriers and new terms like Ethereum, DOGE, SHIB and the Metaverse have taken the world by storm and encapsulated a large portion of society’s attention. For anyone new to the world of crypto, it is entirely acceptable to be confused by the concept and to find yourself spiralling into a rabbit hole of conflicting opinions.
So, what is Cryptocurrency?
Think of Crypto as digital money or virtual money. It only exists in the digital world, in a digital wallet, therefore, there is no physical coin for you to hold in your hands or take to a bank. It is also highly volatile and is not governed by any government body in the entire world.
Why is it so volatile you ask?
Its simple economics. Supply and demand.
Take Bitcoin for instance. Bitcoin was first created in 2009 and was capped at only 21 million coins that could be mined (mined is a term that refers to the “creation” of the currency). As of today, there are just over 18 million bitcoins in circulation around the world. As there is limited supply, the demand for Bitcoin is high, making the price for it often skyrocket at levels well above inflation. Conversely, if economic or world factors make the currency slightly less desirable, the currency can and does fall just as quickly in value.
Cryptocurrency is largely unregulated. Without regulation, it can become unstable with the last price noted being above $46,000 per coin. Crazy numbers when you think these little digital “assets” were once worth cents in the Aussie Dollar, and that was only a few years ago!
The world of cryptocurrency is still incredibly new and the technology behind the encryption is in its infancy. However, platforms like PayPal are starting to allow the use of cryptocurrency, bringing it more and more into the realm of everyday investors and shoppers.
Crypto currency was created as a form of payment that bypassed any government regulation. It gave the community power over their own investments without getting the bank involved so they could make any purchase, with anyone, anywhere around the world without restrictions.
There is continuing word of the Australian government wanting to place regulation on the cryptocurrency market, meaning we could see various effects on crypto pricing, making it even more volatile than it already is and creating consumer doubt.
We’ve seen similar government regulation applied by other countries and even banned cryptocurrency such as Saudi Arabia, Qatar, Egypt, and Iraq.
But what about Tax?
Speaking of regulations, the ATO have been onto investors about the tax payable on potential gains they make for years. At Oracle, we see hundreds of would-be (and seasoned investors alike) dabbling in Crypto on a yearly basis. Unsurprisingly, the ATO is also acutely aware of this.
A capital gain tax (CGT) event occurs when you dispose of your cryptocurrency and make a gain or a loss on it. If you make a gain on the disposal of your crypto, then you may be subject to a tax on your gains when tax time rolls around. However, if you have held you crypto for longer than a year before disposing of it, then you may be subject to a discount on your gains. Simply speaking, the tax you pay on crypto transactions is not dissimilar to the tax you might pay on the sale of an investment property!
However, because there are often so many transactions at play, rather than a single purchase and sale of an asset like a house, the calculation of CGT on crypto can be exceedingly complicated. If you haven’t had experience in the area before, we always recommend seeking advice and assistance at tax time.
We’ve seen so very many taxpayers pay more CGT than they need to, simply because they didn’t understand the rules and tax concessions appropriately.
Also, important to note, The ATO use data-matching technology on a yearly basis and are made privy to the crypto trades you make using most popular wallet platforms. What this means is that contrary to popular belief, the trading of crypto is quite visible to our tax department. It’s not as invisible as you might think! And if the trend of using cryptocurrency like normal cash or PayPal continues, then this places even more importance on getting your tax implications right.
We’ve seen a client and friend use Bitcoin to purchase a motor vehicle. They made quite a gain on the sale of their bitcoin to convert it to a motor vehicle asset, but they forgot about the CGT payable on sale…Their “clever” bitcoin disposal ended up causing a $10,000+ tax debt which they had not even considered until months later when they came to visit their tax accountant…
Summing up Cryptocurrency
The world of crypto can be a fun place to invest and even a fun place to have a “punt” for some people – it can generate your exponential gains, and equally large losses, if you are not careful. It’s important you understand both the investing and tax implications of this quirky currency when you do decide to take the plunge.
If you require any further advice on Crypto Tax, please don’t hesitate to contact our team of specialists.
Written by Oracle Accounting team