Keeping bitcoin in your wallet? What does the taxman say about that?
The rules around cryptocurrency seem to change every day. And coming from my world, this is considered groundbreaking. And maybe a little overwhelming.
Do you have to pay taxes on crypto if you’re not cashing out your bitcoin? Probably not. But this is likely to change in the future.
I think what’s more important is being aware of what the Australian Tax Office says about bitcoin, how it’s taxed, and what you can do to protect your hard-earned income.
For the purposes of getting as much money as they possibly can, the ATO has been very quick to rule on what they say about cryptocurrencies like bitcoin.
In my view, it’s borderline criminal how they’re taxing the Australian people, but I’ve been saying that for years. The way the ATO is handling cryptocurrencies is both shocking and completely expected from those mouthbreathers in Canberra.
For starters, the ATO’s position is that all cryptocurrencies as capital gains taxable assets. So, just like property or investments, simply holding cryptocurrency is not going to attract any taxes. At least, not until you dispose of it.
Now, disposing of bitcoin could happen in several ways, and there are a couple examples I can give you.
If you’re going to sell off your cryptocurrency holdings, and if you make a profit, then the ATO is going to come knocking.
And knock they will. I know that several of my clients have received preemptive letters from the ATO, gently reminding them that they have to declare their bitcoin gains in their income. In all my years practicing tax law, I have NEVER seen the ATO be so forthright and aggressive about a financial instrument. This is completely unprecedented, and it’s going to certainly mark a wave of bitcoin audits in the future.
But disposing of an asset might also be interpreted as using bitcoin for the purpose of a sale.
If you pay for a product or service using bitcoins, or any other cryptocurrency, that could be construed as liable for capital gains tax as well. The only time that wouldn’t apply would be if the bitcoin is used for personal goods and services, and if the value is less than $10,000 AUD.
It’s also worth noting that bitcoin is double-dipped when a business accepts bitcoin as payment because they have to charge sales tax on that transaction. So, the ATO gets your capital gains as well as the GST. See what I mean about criminal?
More bitcoin for you, less for the government
So, unless you’ve decided to use your bitcoin for payment, you won’t have to worry right now about paying taxes if you don’t cash it out.
Instead, it’s much more prudent to spend some time thinking about how you’re going to protect your crypto gains when you do cash out. There are some measures you should take right now that will go a long way toward keeping more of your own money in your pocket.
I’ll warn you. If you want to make a claim that you’re a bitcoin investor, then you’ll have to convince the ATO that you’ve met their very stringent standards. While investors do have some tax advantages, the right to claim them on your taxes depends on your ability to say that you legitimately invest bitcoin as more than a hobby or interest. According to the ATO, these qualities include:
If, and only if, you’ve been able to satisfy those requirements, then you can use your trader status to your advantage. Because as the ATO has made abundantly clear in their court rulings, all cryptocurrencies are assets.
And as an investor, you will be taxed on the capital gains of your profits, just like any other asset you own. But you won’t be paying any taxes on bitcoin assets if you don’t cash out. The point of sale is what matters. But here are a couple of options for you to consider as you think about cashing out your crypto:
And it’s also worth noting that the length of your holds matters. If you can show that you’ve held an asset for over 12 months, then your CGT owing is cut in half. Now, the practicalities of showing that you own a particular amount of bitcoin are tricky, so speak with your accountant about proper tax recordkeeping.
Let me take a moment to get a rant out of the way. If you’re earning your way through bitcoin trading, the ATO wants to classify your profits as capital gains. And yet, if you’re simply doing this as a hobby on the side, the ATO classifies all your profits as income, even though it’s just a bonus project. Talk about screwy priorities. Is it any wonder that I’m passionate about getting my clients to pay attention to their bitcoin taxes, even if they’re not cashing out?
OK, rant over. If you’re just trading cryptos on the side, any profits are going to be taxed as normal income. But that’s not to say that you have to pay the maximum the ATO would be willing to steal from you. Consider a couple of tax structure options that would help you protect your earnings.
That’s the best point to make – that all your best efforts will be in vain to not pay taxes on bitcoin unless you choose to work with a good tax professional. To learn more about anything I’ve mentioned here, or to simply find out the options best suited for your business, have a chat with us today. We’ll give you a no-obligation assessment of your finances, and make sure that your bitcoin profits stay with you.
Talk to us today.