Part 1: Understanding and Managing Crypto Asset Investments
CRYPTO ASSETS
This is part one of a three-part series*
Part 1: Understanding and Managing Crypto Asset Investments
We’re seeing more and more of our clients needing to report on ownership of shares and crypto assets. This is because any dividends or income streams from ownership of these financial assets may be taxable, and sale or transfer or other disposal of the assets themselves may have capital gains tax impacts.
Definition of Crypto Assets
According to the ATO, crypto assets are a digital representation of value that you can transfer, store, or trade electronically, including non-fungible tokens (NFTs). Pretty general… but that is how these definitions usually work (and why you get an accountant!). They typically run using a specified platform such as Ethereum. Crypto carries out operations independently; however, transactions involving such are actually subject to tax rules as assets in general. Application of tax would solely depend on the acquisition, holding, and disposal of the asset. In the tax perspective, crypto assets are not a form of money.
Common Crypto Assets
These include coins and tokens such as:
- Bitcoin, a cryptocurrency
- USDC, a stablecoin
- DAI, an investment token
- GALA, a game token
- BAYC, a non-fungible token
Acquiring and Disposing of Crypto Assets
This can be done through a crypto trading platform. Basically, this is executed through swapping or exchanging crypto assets for other crypto assets, goods and services, or fiat currency. Tax treatment depends on how you mainly use the crypto assets or what action you take with them.
Common Uses of Crypto Assets
- Crypto assets as an investment.
Investors acquire and retain crypto assets to produce a financial profit from holding or disposing them. The general rule for investors is crypto assets are taxed as capital gains tax (CGT) assets, including self managed super funds (SMSFs) investing in crypto assets, and rewards for staking crypto are ordinary income for tax purposes.
Case Analysis: Crypto Assets Held for Investment
Geraldine keeps crypto assets for more than 6 months with the intention of selling at a higher exchange rate. Let’s say after 8 months she decides to dispose of the assets and this results in a capital gain. In theory, Geraldine’s intention of using the crypto assets to see that asset value grow, and then make money upon ‘sale’ or disposal, makes it clear that the asset is used for investment purposes.
- Crypto Assets for Personal Use
If a crypto asset is used for personal purposes, these transactions are not subject to GST.
Case Analysis: Crypto Asset for Personal Use Held for a Short Period of Time
Kim wants to attend a Kpop concert. The concert provider offers tickets with a big discount on the purchase price for payments made in crypto. Kim pays $360 to buy crypto assets, which she then uses to purchase the ticket on the same day. For this example, Kim purchases and uses the crypto in a short period of time to buy personal items. As such, the crypto assets are personal use assets.
- Market Value of New Crypto Asset at Exchange or Swap
Maybe you’re wondering about the market value of a new crypto asset upon exchange? A CGT event would probably occur to your original crypto asset. Upon receiving property instead of money, you would need to figure out the market value of the crypto asset in AUD.
Case Analysis: Market Value of New Crypto Asset at Exchange or Swap
Erin acquired 250 Coin A for $10,000 on 7 January 2023. Erin then decided to exchange 50 Coin A for 100 Coin B through a reputable digital asset exchange on 15 May 2023. Using the exchange rates shown on the digital asset exchange at the time of the transaction, the market value of 100 Coin B was $5,000. Therefore, Erin’s capital proceeds are $5,000 for the disposal of 50 Coin A. Erin uses this amount to work out her capital gain for the CGT event.
- Market Value of Existing Crypto Asset at Exchange or Swap
There might be instances when you can’t determine the value of a crypto asset you received in a crypto asset exchange or swap. When this occurs, you can use the current market value of the crypto asset you’re disposing of to work out the capital proceeds.
Case Analysis: Market Value of Existing Crypto Asset at Exchange or Swap
Chris acquired 200 Coin A for $14,000 on 5 January 2023. Chris then decided to exchange 30 Coin A for a new coin, Coin C, before it is listed on a digital exchange. Chris acquired 100 Coin C in the exchange on 15 March 2023. When the transaction occurred, Coin C didn't have a market value, so Chris used the market value of Coin A on the digital asset exchange at the time of the transaction. The market value of 30 Coin A at the time of exchange was $4,000. Therefore, Chris’ capital proceeds are $4,000 for the disposal of Coin A. Chris used this amount to work out his capital gain for the CGT event.
Acquiring a Crypto Asset as an Investment
The initial acquisition of a crypto asset (first ‘purchase’) is usually not taxable. But once you exchange, swap, or dispose of it, perhaps to acquire a new/different crypto asset, then a CGT event occurs. At that time you may make a Capital gain or a Capital loss, which can be used to reduce capital gains you incurred. Note: If you retain your capital gains asset for at least a year, you could be eligible to lower capital gains utilizing the CGT discount. Keep track of all of your transactions and digital assets in order to determine whether you incurred a capital gain or loss from each CGT event.
How do you calculate CGT?
If you hold crypto assets as investments, you may have to pay tax on your net capital gains for the year, just like with traditional CGT assets (like shares or property).
The process would be:
- Your capital gains,
- less any capital losses,
- less your entitlement to any CGT discount on your capital gains
- = gain to be taxed
But before the calculation of CGT on crypto assets, you will need to verify that you have records of your cryptocurrency assets and transactions and make sure the value of the crypto assets are converted into AUD. Note: Since each cryptocurrency asset is a unique CGT asset, you must keep records for each one separately.
Remember, market values matter when acquiring or disposing of crypto assets, triggering Capital Gains Tax (CGT) events. Keep meticulous records for each crypto asset, calculate gains or losses, and be aware of CGT discounts. This ensures compliance and a clear financial picture in the crypto world.
In the ever-evolving realm of crypto, staying informed about regulations and understanding tax implications empowers you to navigate this exciting financial frontier.
Happy investing!
Check out part two here.
** Accurate at day of publishing**
