The ATO have recently released guidance for self-managed superannuation funds (SMSFs) investing in cryptocurrencies.  To invest in crytocurrencies, the investment must be allowed under the SMSF trust deed and be in accordance with the investment strategy.

When an SMSF acquires and disposes of cryptocurrency, it faces the same taxation and regulatory issues that apply to all other investments.  Please see our earlier article regarding the tax implications of investing in cryptocurrencies.

Below we have highlighted some of the key issues for SMSFs when investing in cryptocurrencies:

 

Investment ownership

Trustees need to ensure that the SMSF has clear ownership of the cryptocurrency (ie.  there must be evidence of a separate cryptocurrency wallet for the SMSF).  The SMSF wallet must be managed separately from the personal and business cryptocurrency investments of the trustees and members.

 

Valuation

The cryptocurrency will need to be reported at market value at 30 June.  The ATO have advised that they will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.

 

Related party transactions

Subject to certain exceptions, an SMSF is prohibited from acquiring assets from related parties (eg. from members).  Cryptocurrencies do not fall within any of the exceptions.  As such, an SMSF cannot acquire cryptocurrencies from trustees or members.

We recommend that you seek independent financial advice when determining whether investing in cryptocurrency is appropriate for your SMSF.

Please do not hesitate to call us on (07) 56656469 if you would like to discuss the tax and regulatory implications of investing in cryptocurrency in your SMSF.

 

With the price of 1 bitcoin reaching US$10,000 this week, it is certainly a hot topic in investment circles.

We have been asked by a number of people about the tax implications of investing in cryptocurrencies, like bitcoin.

There are many different ways in which you can acquire and utilise bitcoin which will give rise to differing tax implications.

 

Bitcoin received in exchange for goods and services

If your business receives bitcoin as payment for your goods or services, the receipt of the bitcoin is ordinary income for your business (and taxed as ordinary income).

 

Bitcoin used to purchase personal use assets

If you purchased A$10,000 worth of bitcoin, and you use this bitcoin to purchase personal use assets, any gain or loss on the bitcoin is disregarded for income tax purposes.

 

Bitcoin used for personal investment

Some people are investing in bitcoin for the purpose of deriving a gain when bitcoin increases in value.  In this situation, any resulting realised gain may be taxed as ordinary income or as a capital gain, depending on the circumstances.  This means, the gain is only taxable when the bitcoin is either sold or exchanged for another currency.

Tax Determination 2014/26 (“TD 2014/26”) confirms that a bitcoin is a CGT asset.  It also considers whether the purchase and sale of bitcoin would be treated as ordinary income or as a capital gain for tax purposes.

 

Tax on ordinary income vs Tax on capital gain

If the gain on disposing of your bitcoin is taxed as ordinary income, it will be added to your other income (salary, interest, dividends etc) and taxed at your marginal tax rates.  The gain will not be eligible for the 50% CGT discount and cannot be offset against any capital losses.  However, if you make a loss on the bitcoin, it can be offset against your other income (salary, interest, dividends etc).

Conversely, if the gain is taxed as a capital gain, it may be eligible for a 50% discount if the bitcoin has been held for more than 12 months.  It may be reduced by any current year or carried forward capital losses.  However, if it is regarded as a capital transaction, any losses will can only be offset against current or future capital gains.

Whether the transaction is ordinary income or a capital gain will depend on the facts and circumstances of each case. 

 

Your bitcoin profit – ordinary income (trader) or capital gain (investor)?

Paragraph 24 of TD 2014/26 suggests the following facts may indicate the transaction is capital in nature:

 A small amount of bitcoin was acquired as a hobby;

• After two years the taxpayer decides to sell the bitcoin for a small profit.

The relevant factors from the example appear to be the amount invested, the time invested and the return on the investment.

Paragraph 22 of the determination sets out that the Commissioner considers that a gain on the sale of bitcoin will be ordinary income where the taxpayer entered into the transaction for the purpose of making a gain and the transaction entered into was a commercial transaction. 

Overall, the following factors will be considered when determining whether the transaction will be taxed as ordinary income or as a capital gain:

• The amount of money invested;

• The length of time the money was invested;

• The original purpose of the investment;

• The amount of profit derived on the sale;

• Whether the bitcoin had any other use.

 

Exchanging bitcoin for another cryptocurrency

If you trade your bitcoin for another cryptocurrency, you are disposing of your bitcoin (which will be subject to Australian tax) and acquiring the new currency.

 

Summary

As you can see, the tax treatment of bitcoin transactions vary depending on the purpose and nature of each transaction.  It is important that you seek professional advice in relation to the tax implications before entering into any transactions. 

 

If you would like to discuss the tax implications of bitcoin, please call us on (07) 56656469.