How is Bitcoin & other Cryptocurrencies Taxed?

Cryptocurrencies are digital assets known for their volatility, high risks and high rewards, which can result in explosive growth and intermittent crashes. Bitcoin, one of the most popular cryptocurrencies, was introduced 13 years ago in a bid to make traditional currencies redundant. 

Over the years, it has become an investment choice for many, due to the substantial return on investment when market conditions were positive. Millions of unsophisticated investors have poured trillions of dollars in a market, which remains unregulated.

However, due to an increase in interest rates and soaring inflation, people’s appetite for risk has significantly diminished. 

If you are thinking about getting into crypto or have already invested in it, it is essential that you know your tax obligations and the implications of buying into the crypto market. Let’s look into Bitcoin and see how it gets taxed.

What is Bitcoin? 

Bitcoin is a digital currency that is mined and held electronically. It is created by hobby miners and companies who run computers 24/7 worldwide, using very advanced hardware to solve complex math problems. Bitcoin is a prime example of trade cryptocurrencies. 

What is cryptocurrency?

Bitcoin is just one type of cryptocurrency. Others include Ethereum, Ripple, Neo, Litecoin, Dash, and the list goes on. Essentially, they are all virtual or digital currencies that use cryptography for protection against counterfeiting. This offers greater security against hackers when transferring funds online.

Just like regular currencies, the value of cryptocurrencies fluctuates widely. When Bitcoin launched in 2009, for example, you could purchase it for a fraction of a cent. Now, a single Bitcoin is worth thousands of dollars. Investors have made – and lost – millions of dollars trading cryptocurrencies on various crypto exchange platforms and the world’s largest financial institutions and governments are paying increasing attention to it.

Cryptocurrencies and Small Businesses

Cryptocurrency offers small businesses fast, transparent, and secure transactions. Removing the middleman entirely, cryptocurrency means you don’t have to rely on slow and expensive payment transfer systems or financial institutions to accept payments. 

If you operate internationally, this is even more enticing, with some bank-to-bank transfers taking almost a week to complete. There are platforms like Coinbase Commerce that enable customers and merchants to buy and sell in various cryptocurrencies.

However, cryptocurrencies do come with a word of warning. Traditionally, their value has fluctuated widely. For businesses, that means what you charge for a product today might have a different value tomorrow.

How is Cryptocurrency Used in Australia?

Just like centralised currencies, cryptocurrencies can be used to purchase a wide range of products and services. Some shops may accept cryptocurrencies as payment, and some specific ATMs would let you withdraw cryptocurrencies as physical money too. For example, CheapAir.com has been accepting Bitcoin payment for flights, hotels, car rentals, and cruises since 2013. 

But, what does this mean for small business? While it’s still early days for cryptocurrency, some noted futurists, such as Thomas Frey, believe it will replace national currencies by 2030.

It is important to note that cryptocurrencies are not a legal tender in Australia and are not widely accepted as payment. 

Ways to Get Bitcoin and Other Cryptocurrencies 

There are three different ways of obtaining Bitcoin and other cryptocurrencies such as Solana or Ethereum.

1. You can mine cryptocurrency

Mining is the process where Bitcoin is created. This means that computers are constantly running, crunching through mathematical problems, and once they solve them, you are rewarded with a Bitcoin.

2. You can buy Bitcoin and other cryptos

If you are interested in purchasing Bitcoin you can store them in an online wallet. There are many exchange systems that connect buyers and sellers. You can secure your own Bitcoin, or portions of different cryptocurrencies, by sending money to the seller via online bank transfer, and some other payment methods (depending on the seller). 

Keeping your cryptocurrencies and Bitcoin in your online wallet can be a risk, since hackers may try to access them. 

To keep your online wallet secure from hackers or any outside threat, there are some standard practices you can follow such as using strong passwords that are unique, using a 2-Factor authentication (2FA), and keeping any recovering information of your account secure. The more layers of security you can add, the better. 

3. You can trade them

You can earn Bitcoin by trading them for goods or services. Countries around the world such as El Salvador and the Central African Republic have started to accept Bitcoin as a legal tender..

Businesses like Microsoft and Starbucks also accept Bitcoin as payment, as well as other 100,000 suppliers around the world. A study from Cambridge University showed that there were about 101 million crypto users worldwide in 2020 alone. 

How is Cryptocurrency Taxed in Australia? 

If you buy crypto and use it to pay for goods and services, there wouldn’t be any GST components attached to it unless you are the person in the business accepting cryptocurrency transactions. 

However, Bitcoin is liable for Capital Gains Tax (CGT). This means that if you send crypto to another person, CGT may apply. Certain exceptions apply when: 

• You used Bitcoin to pay for services or goods for your personal use. For example, you bought coffee at a coffee shop that accepts Bitcoin or made an online booking for a hotel
• The cost of the Bitcoin you used to pay the transaction falls under the $10,000 personal use asset exemption. 

If your transaction exceeds the $10,000 exemption threshold, you will not be exempt from CGT. It becomes a taxable event and you will need to pay CGT, which will be calculated as the increase in value of the cryptocurrency between the time when it was acquired and the time when it was disposed. 

It is important to note however, that if you are paid in crypto for services or products, you will need to pay tax. The amount of Bitcoin that reaches your assessable income will also be subject to deductions and capital losses. 

Using Bitcoin to Buy & Sell Goods & Services 

If you are paid in Bitcoin, taxes work the same as any assessable income. Whether you receive Bitcoin in exchange for goods or services, you need to record the value in Australian dollars as part of your income. You need to apply fair market value to convert Bitcoin to an Australian dollar value. You can use a reputable Bitcoin exchange to find a fair market value. 

If you make purchases for your business using cryptocurrency, you can use it as a tax deduction where applicable. If you sell Bitcoin for business reasons, you may be liable for CGT. Capital proceeds are what you receive when you dispose of your Bitcoin.

Your capital gain is reduced by the amount included in assessable income so that you won't be taxed twice on the same amount. 

Do you Pay Tax if Mining Bitcoin is your Business?

If you derive an income from mining and transferring Bitcoin, this is considered assessable income and will be taxable. You can, however, claim mining activity expenses as a deduction. 

If you incur losses from your mining activity, it may be subject to non-commercial loss provisions. You won't automatically be allowed to offset this against your other income. 

If you hold Bitcoin because you mine or sell it as a business, it is considered trading stock so, at the end of the financial year, you would have to declare the transactions for every time you traded or sold cryptocurrencies, in your tax return. 

Taxpayers Conducting a Bitcoin Exchange 

If you operate a business selling and buying Bitcoin, the proceeds from such sales should be included in your tax return as assessable income. You can claim deductions on expenses that are part of the exchange service, such as the acquisition value of Bitcoin for sale. 

Disposal of Bitcoin

The rules for trading Bitcoin, whether for business or investment, are the same as those that apply to share traders rather than investors. 

Investors are more likely to hold cryptocurrencies to benefit from long-term gains. Traders are interested in short-term buying and selling to make a profit. 

If you purchase Bitcoin for investment purposes, the profits from sales are not classified as assessable income, which means you cannot claim deductions. Instead, CGT applies. If you can prove that Bitcoin was used for personal purposes, you may be able to apply for an asset exemption. 

You cannot apply for an asset exemption and CGT where the cost exceeds $10,000. CGT is calculated as the increase in the cryptocurrency value versus acquisition and sale. If you make a profit, the profit is considered as assessable income, thereby classifying you as a trader instead of an investor. 

Record-Keeping of Bitcoin

If you deal in Bitcoin you need to keep detailed records. Here are a few tips to keep in mind: 

• Ensure you record the date of every transaction;
• Record the amount of the transaction time – use a reputable online exchange for an Australian dollar amount;
• Record the details of the transaction;
• You can make a note of associated expenses, whether there are fees or commissions involved; and
• You can also detail information about the other party based on what is available. If no information is available, the Bitcoin public address is sufficient. 

If you wish to use the CGT personal use exemption, you need to be able to demonstrate that your intention was to use the cryptocurrency to purchase goods or services.

QuickBooks can Help to Assess if you Need to Pay Tax on Bitcoin

QuickBooks Tax software can help you with accounting, payroll, and tax purposes. Tax software can help you keep track of capital acquisitions, crypto tax calculations, and expense tracking. You’ll find all the forms you need to stay on track and file your tax return on time.

While every care has been taken to ensure the accuracy of the information presented as at 1 July 2024, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.