Client Background: Our firm has recently observed a significant surge in our clientele’s interest in cryptocurrency investments, particularly in assets like Bitcoin. One notable case involves an individual who has taken the initiative to actively trade cryptocurrencies, engaging in frequent transactions almost on a daily basis. The client has reached out to us seeking guidance on the potential Capital Gains Tax (CGT) implications and other rules and regulations surrounding cryptocurrency trading.

Our Advice: Navigating cryptocurrency taxation is an evolving landscape, and the Australian Taxation Office (ATO) has regularly updated its guidance in response to this emerging area. Our guidance to the client revolves around assessing the tax implications based on how they are holding and using cryptocurrencies:

  1. Determining Capital vs. Revenue Account:
    • The primary consideration is whether the client holds cryptocurrency on a capital or revenue account, which often depends on their purpose for acquiring the cryptocurrency and how it is utilised.
    • The tax treatment generally depends on whether the cryptocurrency is held as trading stock (part of a business activity), as part of a profit-making undertaking (taxed on revenue account but exempt from non-commercial loss rules or trading stock provisions), on capital account as a personal use asset (capital losses disregarded), or on capital account as a long-term investment.
    • The ATO provides guidance on distinguishing between a trader and an investor in shares, and a similar analysis can be applied to cryptocurrency trading.
  2. GST Treatment for Cryptocurrency Sales:
    • Sales of digital currency are treated as input-taxed supplies, which means that the sales should not trigger Goods and Services Tax (GST).
    • Consequently, the client would generally not be eligible to claim GST credits on expenses related to cryptocurrency trading under Sections 11-5 and 11-15 of the GST Act, which restricts GST credits for expenses linked to input-taxed supplies.

Conclusion: The taxation of cryptocurrency trading presents a dynamic and evolving challenge, with implications that depend on various factors, including the client’s intention, frequency of transactions, and the nature of expenses incurred. In this case study, our client, actively engaged in cryptocurrency trading, sought our guidance on understanding the tax implications.

At Investax, we remain committed to staying abreast of the latest regulatory updates and providing expert advice to help our clients navigate this emerging and complex area of taxation. By assessing each client’s unique circumstances, we aim to ensure compliance with tax laws while optimising their financial positions within the evolving cryptocurrency landscape.