Cryptocurrencies – The tax consequences of using Bitcoin

Wikipedia defines a cryptocurrency (also known as crypto-currency, or crypto) as a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

Bitcoin was created in 2009 by Satoshi Nakamoto as the world’s first cryptocurrency and is the biggest. People and businesses produce Bitcoins running computers all around the world, using software that solves mathematical problems. This process is known as Bitcoin mining.

As at August 2022, cryptocurrency had the following statistics:

• There are over 20,000 different cryptocurrencies
• 4.6 million Australians own cryptocurrencies
• The total market cap of all cryptocurrencies is $1 trillion
• Over $100 billion of cryptocurrencies trade every day.
• Bitcoin has the highest current market cap at over $420 billion – more than double its closest rival Ethereum
• Four of the top 20 cryptocurrencies are directly pegged to USD value – Tether, USD Coin, Binance USD
• 21% of the US population has traded or used cryptocurrency
• As a continent, Asia has over 4x more cryptocurrency users than any other continent

The tax consequences of using cryptocurrency are as follows:

• Trading cryptocurrency for a profit-making purpose will result in any profits being assessable income.
• Cryptocurrency is an asset for capital gains tax (CGT) purposes.
• Cryptocurrency held for 12 months may access the 50% CGT discount.
• Transacting with cryptocurrency is akin to a barter arrangement, with similar tax consequences.
• When receiving cryptocurrency for the sale of goods or services, a business may be charged GST on that cryptocurrency.
• The buying, selling or using of cryptocurrency as a payment is not subject to GST (if not carrying on a business).

To avoid paying tax on any increases in the value of cryptocurrency, it should only be purchased to acquire goods or services for private use. If the original purchase cost of the cryptocurrency was less than $10,000, any capital gain or loss is non-taxable.

SMSF's are allowed to invest in cryptocurrency subject to compliance with the fund's investment strategy – Trustees may struggle to have the cryptocurrency registered in the fund's name which will be a breach of the SIS Act.