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  • Transacting with cryptocurrency

    A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. A disposal can occur when you:

    • sell or gift cryptocurrency
    • trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)
    • convert cryptocurrency to fiat currency (a currency established by government regulation or law ), such as Australian dollars, or
    • use cryptocurrency to obtain goods or services.

    If you make a capital gain on the disposal of cryptocurrency, some or all of the gain may be taxed. Certain capital gains or losses from disposing of a cryptocurrency that is a personal use asset are disregarded.

    If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain.

    While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate CGT asset.

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    Exchanging cryptocurrency for another cryptocurrency

    If you dispose of one cryptocurrency to acquire another cryptocurrency, you dispose of one CGT asset and acquire another CGT asset. Because you receive property instead of money in return for your cryptocurrency, the market value of the cryptocurrency you receive needs to be accounted for in Australian dollars.

    If the cryptocurrency you received can't be valued, the capital proceeds from the disposal are worked out using the market value of the cryptocurrency you disposed of at the time of the transaction.

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    Example 1

    On 5 July 2017, Katrina acquired 100 Coin A for $15,000. On 15 November 2017, through a reputable digital currency exchange, Katrina exchanged 20 of Coin A for 100 of Coin B.

    Using the exchange rates on the reputable digital currency exchange at the time of the transaction, the market value of 100 Coin B was $6,000. For the purposes of working out Katrina's capital gain for her disposal of Coin A, her capital proceeds are $6,000.

    End of example

    Cryptocurrency as an investment

    If you acquire cryptocurrency as an investment, you may have to pay tax on any capital gain you make on disposal of the cryptocurrency.

    You will make a capital gain if the capital proceeds from the disposal of the cryptocurrency are more than its cost base. Even if the market value of your cryptocurrency changes, you do not make a capital gain or loss until you dispose of it.

    If you hold the cryptocurrency as an investment, you will not be entitled to the personal use asset exemption. However, if you hold your cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount to reduce a capital gain you make when you dispose of it.

    If you have a net capital loss, you can use it to reduce a capital gain you make in a later year. You can't deduct a net capital loss from your other income.

    You must keep records of each cryptocurrency transaction to work out whether you have a made a capital gain or loss from each CGT event.

    Example 2

    Terry has been a long-term investor in shares and has a range of holdings in various public companies in a balanced portfolio of high and low risk investments. Some of his holdings are income producing and some are not. He adjusts his portfolio frequently at the advice of his adviser.

    Recently, Terry's adviser told him that he should invest in cryptocurrency. On that advice, Terry purchased a number of different cryptocurrencies which he has added to his portfolio. Terry doesn't know much about cryptocurrency but, as with all of his investments, he adjusts his portfolio from time to time in accordance with appropriate investment weightings.

    If Terry sells some of his cryptocurrency, the proceeds would be subject to CGT because he has acquired and held his cryptocurrency as an investment.

    End of example

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    Staking rewards and airdrops

    Proof of Stake is a form of 'consensus mechanism' that requires forgers (similar to miners) to hold units of a cryptocurrency so they can validate transactions and create new blocks. Forgers participate in consensus by staking their existing tokens.

    A forger who is selected to forge a new block is rewarded with additional tokens when the new block has been created. The additional tokens are received from holding the original tokens. The money value of those additional tokens is ordinary income of the forger at the time they are derived.

    Other consensus mechanisms that reward existing token holders for their role in maintaining the network will have the same tax outcomes. This would include rewards derived through Proof of Authority and Proof of Credit mechanisms by Validators, Agent Nodes, Guardian Nodes, Premium Stakers and other entities performing comparable roles.

    Token holders who participate in 'proxy staking' or who vote their tokens in delegated consensus mechanisms, and receive a reward by doing so, also derive ordinary income equal to the money value of the tokens they receive.

    Some projects 'airdrop' new tokens to existing token holders as a way of increasing the supply of tokens (for example, Pundi X and Tron). The money value of an established token received through an airdrop is ordinary income of the recipient at the time it is derived.

    Example 1

    Anastasia holds 50,000 NULS tokens, which she stakes to a NULS pool as a premium staker. Anastasia receives additional NULS tokens when her pool participates in consensus, including a small payment of tokens from the node leader for supporting their node.

    The money value of the additional NULS tokens Anastasia receives is assessable income of Anastasia at the time the tokens are derived.

    The cost base of Anastasia’s additional NULS tokens will be their market value at the time they were derived.

    End of example

     

    Example 2

    Merindah has held TRX tokens since December 2018, entitling her to receive monthly BTT airdrops from February 2019.

    The money value of the BTT tokens Merindah receives as a result of holding her TRX tokens is assessable income of Merindah at the time the tokens are derived.

    The cost base of Merindah’s airdropped BTT tokens will be their market value at the time they were derived.

    End of example

    Personal use asset

    Some capital gains or losses that arise from the disposal of a cryptocurrency that is a personal use asset may be disregarded.

    Cryptocurrency is a personal use asset if it is kept or used mainly to purchase items for personal use or consumption.

    Cryptocurrency is not a personal use asset if it is kept or used mainly:

    • as an investment
    • in a profit-making scheme, or
    • in the course of carrying on a business.

    Where cryptocurrency is acquired and used within a short period of time, to acquire items for personal use or consumption, the cryptocurrency is more likely to be a personal use asset.

    However, where the cryptocurrency is acquired and held for some time before any such transactions are made, or only a small proportion of the cryptocurrency acquired is used to make such transactions, it is less likely that the cryptocurrency is a personal use asset. In those situations the cryptocurrency is more likely to be held for some other purpose.

    Except in rare situations, the cryptocurrency will not be a personal use asset:

    • when you have to exchange your cryptocurrency to Australian dollars (or to a different cryptocurrency) to purchase items for personal use or consumption, or
    • if you have to use a payment gateway or other bill payment intermediary to purchase or acquire the items on your behalf (rather than purchasing or acquiring directly with your cryptocurrency).

    The relevant time for working out if an asset is a personal use asset is at the time of its disposal.

    During a period of ownership, the way that cryptocurrency is kept or used may change (for example, cryptocurrency may originally be acquired for personal use and enjoyment, but ultimately kept or used as an investment, to make a profit on ultimate disposal or as part of carrying on a business). The longer a cryptocurrency is held, the less likely it is that it will be a personal use asset – even if you ultimately use it to purchase items for personal use or consumption.

    Only capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded.

    Example 1

    Michael wants to attend a concert. The concert provider offers discounted ticket prices for payments made in cryptocurrency. Michael pays $270 to acquire cryptocurrency and uses the cryptocurrency to pay for the tickets on the same day. Under the circumstances in which Michael acquired and used the cryptocurrency, the cryptocurrency is a personal use asset.

    End of example

     

    Example 2

    Peter has been regularly keeping cryptocurrency for over six months with the intention of selling at a favourable exchange rate. He has decided to buy some goods and services directly with some of his cryptocurrency. Because Peter used the cryptocurrency as an investment, the cryptocurrency is not a personal use asset.

    End of example

     

    Example 3

    Josh pays $50 to acquire cryptocurrency each fortnight. During each of the same fortnights, he uses the cryptocurrency to enter directly into transactions to acquire computer games. Josh does not hold any other cryptocurrency.

    In one fortnight, Josh identifies a computer game that he wishes to acquire from an online retailer that doesn't accept the cryptocurrency. Josh uses an online payment gateway to acquire the game. Under the circumstances in which Josh acquired and used the cryptocurrency, the cryptocurrency (including the amount used through the online payment gateway) is a personal use asset.

    End of example

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    Loss or theft of cryptocurrency

    You may be able to claim a capital loss if you lose your cryptocurrency private key or your cryptocurrency is stolen.

    In this context, the issue is likely to be whether the cryptocurrency is lost, whether you have lost evidence of your ownership, or whether you have lost access to the cryptocurrency.

    Generally where an item can be replaced it is not lost. A lost private key can't be replaced. Therefore, to claim a capital loss you must be able to provide the following kinds of evidence:

    • when you acquired and lost the private key
    • the wallet address that the private key relates to
    • the cost you incurred to acquire the lost or stolen cryptocurrency
    • the amount of cryptocurrency in the wallet at the time of loss of private key
    • that the wallet was controlled by you (for example, transactions linked to your identity)
    • that you are in possession of the hardware that stores the wallet
    • transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity.

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    Chain splits

    A chain split refers to the situation where there are two or more competing versions of a blockchain. These competing versions share the same history up to the point where their core rules diverged.

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    Cryptocurrency held as an investment

    If you hold cryptocurrency as an investment, and receive a new cryptocurrency as a result of a chain split (such as Bitcoin Cash being received by Bitcoin holders), you do not derive ordinary income or make a capital gain at that time as a result of receiving the new cryptocurrency.

    If you hold the new cryptocurrency as an investment, you will make a capital gain when you dispose of it. When working out your capital gain, the cost base of a new cryptocurrency received as a result of a chain split is zero. If you hold the new cryptocurrency as an investment for 12 months or more, you may be entitled to the CGT discount.

    Example 1

    Alex held 10 Bitcoin on 1 August 2017 as an investment, when Bitcoin Cash split from Bitcoin. Immediately after the chain split, Alex held 10 Bitcoin and 10 Bitcoin Cash. Alex does not derive ordinary income or make a capital gain as a result of the receipt.

    On 25 May 2018, Alex sold the 10 Bitcoin Cash for $4,000. Because the cost base of the Bitcoin Cash was zero, Alex makes a total capital gain of $4,000 in the 2017–18 income year from the sale of the Bitcoin Cash.

    End of example

    Working out which cryptocurrency is the new asset received as a result of a chain split requires examination of the rights and relationships existing in each cryptocurrency you hold following the chain split. If one of the cryptocurrencies you hold as a result of the chain split has the same rights and relationships as the original cryptocurrency you held, then it will be a continuation of the original asset. The other cryptocurrency you hold as a result of the chain split will be a new asset.

    Example 2

    Bree held 60 Ether as an investment just before the chain split on 20 July 2016. Following the chain split, Bree held 60 Ether and 60 Ether Classic. The chain split resulted from a protocol change that invalidated the holding rights attached to approximately 12 million pre-split Ether.

    Ether Classic exists on the original blockchain, which rejected the protocol change and continued to recognise all of the holding rights that existed just before the chain split. Ether Classic is the continuation of the original asset. The Ether that Bree received as a result of the chain split is her new asset. The acquisition date of Bree's post-split Ether is 20 July 2016.

    End of example

    Where none of the cryptocurrencies you hold following the chain split has the same rights and relationships as the original cryptocurrency you held, then the original asset may no longer exist. CGT event C2 will happen for the original asset. In that case, each of the cryptocurrencies you hold as a result of the chain split will be acquired at the time of the chain split with a cost base of zero.

    Example 3

    Ming held 10 Bitcoin Cash as an investment just before the chain split on 15 November 2018. Ming had acquired the Bitcoin Cash on 6 April 2018 with a cost base of $8,300. Following the chain split, Ming held 10 Bitcoin Cash ABC and 10 Bitcoin Cash SV. Both projects involved changes to the core consensus rules of the original Bitcoin Cash protocol.

    Neither project exists on the original blockchain. Miners using the pre-fork software would not find blocks on either the ABC or SV chains. Neither of the post-split assets is the continuation of the original asset. The community abandoned the original asset at the time of the chain split. CGT event C2 happened to Ming’s original Bitcoin Cash on 15 November 2018. Ming calculates a capital loss of $8,300, which is equal to the cost base of his original asset.

    Ming’s Bitcoin Cash ABC and Bitcoin Cash SV both have an acquisition date of 15 November 2018 and a cost base of zero.

    End of example

    Cryptocurrency held in a business you carry on

    A new cryptocurrency you receive as a result of a chain split in relation to cryptocurrency held in a business you carry on will be treated as trading stock where it is held for sale or exchange in the ordinary course of the business. The new cryptocurrency must be brought to account at the end of the income year.

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      Last modified: 30 Mar 2020QC 42159