Investing in Bitcoin? Know the tax implications
A bit confused about Bitcoin? What is it and what does tax have to do with it?
Here, we share a few key facts and the tax consequences that may arise if you are thinking about investing (or have already invested) in Bitcoin.
Note! Any reference to Bitcoin in this article refers to cryptocurrency, or other crypto or digital currencies that have the same characteristics as Bitcoin.
Bitcoin was the first cryptocurrency but now, it is just one of many types of cryptocurrencies. As at 2017, there were around 1,100 different cryptocurrencies in existence.
Cryptocurrencies are a type of global digital currency that uses encryption techniques to buy or sell items. Where traditional currencies are regulated by a central bank, Bitcoin is an unregulated currency. Each transaction is registered on a shared public ledger called a ‘blockchain’.
Tip! Be aware of tax scammers impersonating the ATO and demanding Bitcoin or other cryptocurrency as a form of payment for fake tax debts. Cryptocurrency operates in a virtual world, and once the scammers receive payment, it is virtually impossible to get it back.
The ATO’s view is that Bitcoin is neither money nor Australian or foreign currency. Rather, it is property and is treated as an asset for capital gains tax (CGT) purposes.
Other cryptocurrencies that have the same characteristics as Bitcoin will also be assets for CGT purposes and will be treated similarly for tax purposes.
CGT ‘events’ are the different types of transactions that may result in a capital gain or capital loss. A CGT event happens when you dispose of your cryptocurrency.
Disposing of your cryptocurrency means:
If you make a capital gain on the disposal of a cryptocurrency, some or all of the gain may be taxed.
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.
Personal use of cryptocurrency is not subject to income tax or GST in Australia.
Cryptocurrency may be a personal use asset if it is acquired and kept or used mainly to purchase items for personal use or consumption.
Some capital gains or losses that arise from the disposal of cryptocurrency that is a personal use asset may be disregarded.
If you acquire Bitcoin as an investment, it means you have kept or used your cryptocurrency in a profit-making scheme or in the course of carrying on a business.
The tax consequences are:
Tip! You must keep records of:
Examples of businesses that involve cryptocurrency include:
In the context of carrying on a business, funds or property you receive through the acquisition and disposal of cryptocurrency are likely to be ordinary assessable income where you receive money or property in the ordinary course of your business.
If these gains or profits are ordinary income, you may be able to claim deductions. Any capital gains you make are reduced to the extent that they are also ordinary income.
Note! Proceeds from the sale of cryptocurrency held as trading stock in a business are ordinary income.
While self-managed superannuation funds (SMSFs) are not prohibited from investing in Bitcoin and other cryptocurrencies, trustees are reminded that the investment must:
Did you know that the ATO scrutinises every tax return?
This year, the ATO is cracking down on taxpayers claiming incorrect ‘other’ work-related expenses. It’s important to make sure you don’t claim more than you are entitled to!
The ATO uses real-time data to compare taxpayers with others in similar occupations and income brackets, to identify higher-than-expected claims related to expenses including vehicle, travel, internet and mobile phone, and self-education.
To claim work-related expenses, keep in mind these 4 points:
Work expenses reimbursed to you by your employer are not deductible in your personal income tax return. The ATO can seek information from your employer if it suspects you have claimed as a deduction an expense for which you have already been reimbursed.
Tip! If the expense was for both work and private purposes, you can only claim a deduction for the work-related portion.
Need to do some repairs on your rental property? You may be able to deduct these repairs and maintenance costs.
The first thing to remember is that the repairs and maintenance costs must relate directly to ‘wear and tear’ or other damage that occurred as a result of you renting out the property.
Repairs mean work to make good or remedy defects in, damage to or deterioration of the property. It generally involves a replacement or renewal of a worn out or broken part (e.g. replacing guttering damaged in a storm, fixing a fence damaged by a falling tree branch).
Maintenance is preventing or fixing existing deterioration (e.g. painting the property, oiling the deck).
You can generally claim an immediate deduction (that is, in the income year that you pay for the costs) for your expenses related to the repairs and maintenance of your property, including interest on loans.
If your property is negatively geared you may be able to deduct the full amount of rental expenses against your rental and other income, such as salary and wages and business income.
You cannot claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting out your property (e.g. remodelling a bathroom or adding a pergola).
These are classified as ‘improvements’ and are capital expenses you may be able to claim over a number of years as capital works deductions or deductions for decline in value.
Improvement means work that:
How this works!
Sarah replaced a fibre cement sheeting (fibro) wall inside her property because it was damaged by tenants. She replaced the old wall with a brick feature wall.
The new wall is an improvement because Sarah did more than just restore the efficient functioning of the wall. This means Sarah cannot claim the cost of the new wall as a repair, but she can claim it as capital works expenditure.
However, had Sarah replaced the fibro with a current equivalent, such as plasterboard, she could have claimed her costs as a repair. This is because it would have merely restored the efficient functioning of the wall without changing its character, even though a different material was used.
Tip! If you invest in a rental property, you’ll need to keep records right from the start, work out what expenses you can claim as deductions, and declare all your rental-related income in your tax return. ■
Are you risking your retirement savings?
If you’re planning for your retirement, don’t risk your nest egg by getting involved in arrangements that are at odds with tax and superannuation laws!
The ATO has identified a range of new arrangements that are directed towards minimising or avoiding tax. They are designed to help individuals and other related entities to minimise their tax bill by channelling money inappropriately through SMSFs.
If you are involved in an illegal arrangement, you can face severe penalties under tax and super laws. You could lose your retirement savings or your rights, as a trustee, to manage your own super fund.
Often these arrangements are structured in a way so that they appear to satisfy regulatory rules while minimising tax or even providing a tax refund. You cannot claim the total costs of repairs and maintenance in the year you paid them if they did not relate directly to wear and tear or other damage occurring due to renting.
Tip! Seek independent advice from a trusted SMSF tax adviser before entering into ‘too good to be true’ arrangements!
Key tax dates
15 May 2018
2017 income tax return due if lodging through a tax agent if your return not due earlier. Tax to be paid as advised on the notice of assessment.
5 June 2018
2017 income tax return due for individuals with a lodgement due date of 15 May 2018 if lodging through a tax agent provided you also pay any liability due by this date.
TaxWise® News is distributed by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.
This is a concessional arrangement provided to tax agents where individuals will not pay failure to lodge on time (FTL) penalties if they lodge and pay by this date.