How the ATO treats cryptocurrencies such as Bitcoin depends on how they’re used. If you are transacting with digital currency in your business, it’s important to know how it could be taxed.
Here’s a brief overview.
Business use of cryptocurrencies
Examples of business use of cryptocurrencies include regular income and expenses, payroll and investments.
– Regular transactions
If your business receives payments for goods or services in a cryptocurrency, it is treated as ordinary income and is subject to income tax. Similarly, any expenses paid for with digital currencies are tax deductible.
The same GST rules apply for these types of transactions as they do for Australian dollars.
Note that in these cases, the value of the cryptocurrency is determined according to its fair market value. You should be able to find this out from a reputable digital currency exchange.
If you use a salary sacrifice arrangement to pay an employee partially in a cryptocurrency instead of Australian dollars, it is treated as a fringe benefit and subject to FBT.
However, if there is no salary sacrifice arrangement, then the cryptocurrency payment would be considered part of normal wages. In this case, it would be subject to the usual PAYG.
– Occasional investments
If you acquire cryptocurrency in your business and hold onto it for a period of time, any gains made when you dispose of it could be subject to Capital Gains Tax (CGT).
However, this depends on the situation. In some cases, it could be treated as ordinary income.
– Cryptocurrency investment businesses
For businesses involved in making a profit through regular cryptocurrency trading, mining or exchange, trading stock rules apply rather than CGT.
This means any gains from disposing of the cryptocurrency would be treated as ordinary income rather than capital gains. Likewise, any costs of acquiring the cryptocurrency are deductible.
How is personal use of cryptocurrency taxed?
How you use a cryptocurrency in your personal life affects how it is taxed.
For example, if you acquired some Bitcoin and quickly used it buy a computer or TV below $10,000 in value for your own personal use, it would be treated as a ‘personal use asset’ and be tax-exempt.
Investing is another matter though. If you were to acquire some Bitcoin (or another digital currency asset) and hold it for later profit, any gains on disposal would be subject to CGT.
Disposal includes selling the cryptocurrency, exchanging it for another cryptocurrency, converting it to Australian dollars or using it to buy goods.
Bookkeeping for cryptocurrencies
The tax rules are very complex, which makes it extremely important to be rigorous in your record keeping when it comes to cryptocurrencies. This includes recording the purpose of each transaction, and keeping business and personal activities entirely separate.
For assistance in your business bookkeeping activities, whether in Australian dollars or in cryptocurrencies, feel free to get in touch with our team.
(Note: this is for general information only and it’s important to speak to your bookkeeper or accountant regarding your own activities).