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  • Cryptocurrency used in business

    If you are carrying on a business that involves transacting with cryptocurrency the trading stock rules apply, rather than the CGT rules.

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    Cryptocurrency businesses

    If you hold cryptocurrency for sale or exchange in the ordinary course of your business the trading stock rules apply, and not the CGT rules. Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income, and the cost of acquiring cryptocurrency held as trading stock is deductible.

    Examples of businesses that involve cryptocurrency include:

    • cryptocurrency trading businesses
    • cryptocurrency mining businesses
    • cryptocurrency exchange businesses (including ATMs).

    Not all people acquiring and disposing of cryptocurrency will be carrying on businesses. To be carrying on business, you will usually:

    • carry on your activity for commercial reasons and in a commercially viable way
    • undertake activities in a business-like manner – this would typically include preparing a business plan and acquiring capital assets or inventory in line with the business plan
    • prepare accounting records and market a business name or product
    • intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term.

    There is also usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.

    Whether you are carrying on a business and when the business commences are important pieces of information. If you’re still setting up or preparing to go into business, you might not yet have started the business.

    Money received (or property received) prior to a business being carried on is not generally assessable income. Likewise, you can't claim deductions incurred prior to the business being carried on.

    Example 1

    Sachin is in the business of trading cryptocurrency. On 15 December 2017, he purchases 1,500 Coin A for $150,000. On the same day, he sells 1,000 Coin A for $200,000. As Sachin holds the cryptocurrency for sale or exchange in the ordinary course of his business, Sachin can claim a deduction for $150,000 for the acquisition for Coin A and declares income of $200,000 for the later sale of Coin A.

    End of example

    See also:

    Using cryptocurrency for business transactions

    If you are carrying on a business that is not a cryptocurrency business, but use cryptocurrency in your activities you need to account for cryptocurrency as you would for other assets or items used in your business.

    If you receive cryptocurrency for goods or services you provide as part of your business, you need to include the value of the cryptocurrency in Australian dollars as part of your ordinary income. This is the same process as receiving any other non-cash consideration under a barter transaction.

    One way of determining the value in Australian dollars is the fair market value which can be obtained from a reputable cryptocurrency exchange.

    Where you purchase business items using cryptocurrency (including trading stock) you are entitled to a deduction based on the market value of the item acquired.

    See also:

    • IT 2668 Income tax: barter and countertrade transaction

    Isolated profit-making business or commercial transactions

    If you invest in cryptocurrency with simply the hope that it increases in value, any gain you make from disposal will be treated as a capital gain.

    However, there can be situations where an isolated cryptocurrency transaction or series of transactions can give rise to ordinary income if:

    • you entered into the transaction with a purpose or intention of making a profit, and
    • the transaction is part of a business operation or commercial in character.

    Relevant considerations for working out whether a transaction has such a character, include:

    • the nature of the entity undertaking the transaction
    • the nature and scale of other activities undertaken by the entity
    • the amount of money involved and the scale of the profit sought or obtained
    • the nature, scale and complexity of the transaction
    • the length of time over which the transaction occurs
    • whether the property, in this case the cryptocurrency, had any other use other than as an object of trade (for example, is it used as a medium of exchange or to buy services only available on the blockchain?)

    Whether there is the necessary profit-making intention and business or commercial character of the transaction will depend on the particular facts and circumstances of each case.

    Example 1

    CPU Pty Ltd runs a computer retailing business. Kyrib owns the company and manages the business. Kyrib has spent a lot of time researching cryptocurrencies and has identified an arbitrage opportunity involving multiple cryptocurrency pairs.

    Kyrib has also developed strategies to reduce the risk of losses, including fast response programs to adjust for events occurring during the series of transactions and offsetting option arrangements.

    To maximise the profits from the transactions, Kyrib causes CPU Pty Ltd to spend $500,000 to acquire Coin B. Back-to-back transactions are then undertaken on the same day, resulting in a net profit of $20,000.

    The net profit is ordinary income of CPU Pty Ltd as the transactions have a business or commercial character and were entered into with a purpose of making a profit.

    End of example

    See also:

    • TR 92/3 Income tax: whether profits on isolated transactions are income

    Paying salary or wages in cryptocurrency

    Where an employee has a valid salary sacrifice arrangement with their employer to receive cryptocurrency as remuneration instead of Australian dollars, the payment of the cryptocurrency is a fringe benefit and the employer is subject to the provisions of the Fringe Benefits Tax Assessment Act 1986.

    The benefit will be a property benefit whose value is established at the time of provision of the benefit.

    In the absence of a valid salary sacrifice agreement, the employee is considered to have derived their normal salary or wages and the employer will need to meet their pay as you go (PAYG) obligations on the Australian dollar value of the cryptocurrency it pays to the employee. An example of this is where an employee has already earned their salary or wages and then asks to be paid in cryptocurrency instead.

    See also:

    • TR 2001/10 Income tax: fringe benefits tax and superannuation guarantee: salary sacrifice arrangements
    • TD 2014/28 Fringe benefits tax: is the provision of bitcoin by an employer to an employee in respect of their employment a property fringe benefit for the purposes of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986?

    Receipt of cryptocurrency for services provided

    Projects may reward third parties who provide services to the project with tokens. Those services could include network testing, application development or provision of specialist advice (accounting, legal, marketing, etc). The money value of these tokens is ordinary income of the recipient at the time the tokens are derived.

    Example 1

    Dora provides legal advice to Project ICO and receives 10,000 ICO tokens as consideration for her services. The money value of the 10,000 ICO tokens is ordinary income of Dora at the time the tokens are derived.

    When Dora later sells her cryptocurrency the cost base of her tokens is their market value at the time she received them.

    End of example

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      Last modified: 30 Mar 2020QC 42159