Bitcoin millionaires face potential tax challenges

By Leon Mok - November 16, 2017

What are my tax obligations if I buy and sell crypto-currencies such as bitcoin? What do I need to be aware of? Do my obligations change as my level of activity does?

To understand the lure of a crypto currency, consider this.

If you were canny enough to have bought $1000 of shares in tech giant Apple back in 2003, your stake would today be worth about $26,000, a healthy return worth many times your original investment.

But had you bought a mere $5 in bitcoin in May 2010, today your stake could be worth more than $20 million.

It’s a surge that has left a few lucky people vastly better off, but what are the tax implications for crypto- millionaires?

Bitcoin is the best known of the crypto currencies, but there now more than 1000 forms of these digital assets. Other forms have also seen incredible rises, such as Ethereum, which has rocketed from about $US8 in January this year to about $US300 in November.

Like ordinary currency, bitcoin and its competitors can be used to transfer funds from one party to another.

Unlike other currencies, the creation and management of crypto currencies is entirely digital, using blockchain distribution. The currencies are encrypted, which can obscure ownership, and their exchange takes place outside the traditional system of central banks.

Yet they can be used to purchase real world assets, from the illicit — drugs and illegal arms — to the everyday — pizzas and houses.

While bitcoin and other crypto currencies are far from common assets (it is estimated that fewer than 14 million people across the world own bitcoin) inevitably some Australians will find themselves enjoining a bitcoin windfall.

But it is important to be aware of the tax implication of crypto currencies to ensure you are reporting any profits correctly to the ATO.

The tax treatment on proceeds from the disposal of bitcoin can vary depending on your circumstances. For a start, intention matters.

If you purchased a sizeable quantity of bitcoin for the purposes of holding them and selling them later for a profit, you are taken to have purchased them as an investment, no different to purchasing an investment property.

Bitcoin is considered a Capital Gains Tax asset and any profit made from the sale can be subject to Capital Gains Tax. Factors such as the amount of money invested and the length of time they are held can help to determine if this situation is applicable to you.

In cases where the investment is held for more than 12 months you might qualify for a 50% discount on any capital gains you make from the disposal.

There are some situations where bitcoin may be considered a personal use asset. Under Australia’s tax law, any capital gain arising from the sale of a personal use asset is disregarded where the asset’s cost base is less than $10,000.

Broadly, a personal use asset is considered to be one that is used or kept mainly for personal use or enjoyment. However, a thorough analysis of an individual’s circumstances is required to determine if the personal use conditions apply to you.

Finally, there are further implications for GST to consider if you are using bitcoins as part of your business, or you are conducting a business as a bitcoin miner or exchange. If you are carrying on a business as a bitcoin miner, trader or operating a bitcoin exchange the taxation of bitcoin may also be affected by the trading stock rules.

So while your crypto currency dabbling may be lucrative, it has real world implications that can’t be ignored.

Pitcher Partners can help you navigate the tax implications of crypto currencies and other assets. Talk to your Pitcher Partners expert to get specific advice on your situation. 

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Rob Southwell

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Managing Partner and Partner – Private Business and Family Advisory

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Michael Minter

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Managing Partner

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Leon Mok

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Managing Director

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Brendan Britten

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Managing Partner and Executive Director/Partner- Business Advisory and Assurance

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Nigel Fischer

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Managing Partner - Private Business and Family Advisory

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