Taxes, love them or hate them it's an unescapable part of life even when it comes to your cryptocurrencies, more specifically though the famous bitcoin which has of recently gained plenty of traction from its spectacular rise even over the past few days. Trading in bitcoins does have tax consequences if dealt with inappropriately, so that’s why it’s best to stay in the know rather than be stung by hefty fines by the Australian Taxation Office (Australia’s version of the IRS).
Essentially what it boils down to for the ATO is: did you buy the bitcoins for personal “consumption” or “speculative gain”. Hall & Wilcox partner Anthony Bradica said:
Every single transaction needs to be fully documented, including not only "what"' is purchased, but "why" it was purchased.
If you intend to use the profits from your bitcoin ventures to purchase goods and services for personal use then it will go under “capital gains”. That is, you will be taxed at marginal rates for any appreciation in value of your capital.
Some good news
There’s a 50 per cent capital gains tax discount that may also apply to you if you have had it for less than 12 months, which means only half of your gains will taxed. Furthermore, if you originally brought your bitcoin for under $10,000, the gains you’ve made since then will be considered a "personal use asset".
Here’s a good example I found:
Mark can't help but embrace technology and in 2013 he bought $4,000 of Bitcoin with the intention that, once it became more widely accepted, he would use it for everyday purchases. Four years on and he still has the original tranche of Bitcoin, only now it is worth $20,000.
Over the course of 2017, Mark spends it on clothes and a gym membership.
He will pay no tax on the $16,000 gain. Had Mar purchased more than $10,000 originally, thus exceeding the personal use asset threshold, he would need to declare the difference - $12,000 - as a capital gain in his tax return.
Because he has held the asset for more than a year, only half the gain would be taxed at his marginal rate and he could offset any losses in acquiring or holding the Bitcoin as a capital loss against other capital gains.
This is not available to those who come in under the $10,000 personal use asset category.
Speculation
If however, you are deemed to be buying bitcoins for speculation (which lets face it most people are) your gains will be taxed as a form of income at marginal rates, rather than capital gains.
But how will they know? Good question as the nature of bitcoin is decentralised and unobservable chances are you might get away with it for the time being as bitcoin technology is advancing and many government agencies are getting left in the dust. Unfortunately, some people will be reviewed or audited if the ATO smell something fishy, for example living beyond your taxed income or a steep decline in bank account activity.
How will increased government regulation affect the crypto market long term? Let me know what you think.
Thanks for reading.