To HODL or not to HODL – that appears to be the question of the day.
We have received a lot of questions recently about the income tax consequences of selling Cryptocurrencies for a loss.
Your reporting obligations will largely depend on whether you are treated as a Cryptocurrency trader (business), investor or a personal user. We have provided some guidance in our Australian Tax Guide as to when you may be treated as either a business, investor or personal user – this can be downloaded at https://qcaccountants.com.au/Cryptocurrencies.
Cryptocurrency Traders (individual tax payers)
Cryptocurrency traders are treated like any other business, the sales of coins are recorded as income & the purchases being cost of sales. Businesses are also generally able to claim other tax deductions which reduce the business net profit or loss.
If an individual business does incur a net business loss for a financial year it may be able to apply that loss against other types of income, like salary & wages or rental property income.
For example: if an individual taxpayer earns $50,000 of salary & wages income, but has incurred a $30,000 loss from their cryptocurrency business, they may be eligible to only pay income tax on $20,000. As you can see this would be a great tax benefit to some taxpayers.
To be able to offset the cryptocurrency loss, you must pass one of these four tests:
- assessable income test – the business has assessable income of at least $20,000;
- profits test – the business had a profit for tax purposes in three out of the past five years (including the current year);
- real property test – the value of real property or of an interest in real property that you used in the business on a continuing basis was at least $500,000; or
- other assets test – the value of assets (excluding real property, cars, motor cycles and similar vehicles) you used on a continuing basis in carrying on the business was at least $100,000.
Practically, if you have sold over $20,000 of cryptocurrencies within the financial year you will likely meet the ‘assessable income test’ and be able to offset any business losses.
If you have not sold over $20,000 of cryptocurrencies, it is unlikely that you would meet the criteria for operating a cryptocurrency business.
Investors (individual tax payers)
Each sale of cryptocurrencies for Investors are separate capital gains tax events. Where the amount you receive (the proceeds) are greater than the price you pay (cost base) you will report a capital gain. Where the cost base is more than the proceeds you will incur a capital loss.
Where investors have multiple capital gains tax events within a single financial year, the events are added together to calculate a ‘Net Capital Gain or Loss’.
Dissimilar to Cryptocurrency Traders, Net Capital Losses CANNOT be offset against other types of income, instead they must be carried forward into future tax years where you have derived a net capital gain.
For example: if an individual investor earns $50,000 of salary & wages income, but has incurred a $30,000 net capital loss from cryptocurrency sales. They will likely be required to pay income tax on $50,000 and carry-forward the net capital loss of $30,000 to future tax years.
Unfortunately for Personal Users – losses that you incur on a personal use asset are specifically excluded. This means that you cannot either offset the loss against other types of income or carry it forward. Losses from personal use assets are effectively lost.
We are concerned that the ATO may be inclined to treat some investors as personal users where they have incurred a loss.
Preparing Your Income Tax Return
Reporting your business or investment activities from Cryptocurrencies can be complex, we recommend that you work with us to ensure that your tax obligations are accurately reported. If we can be of any further assistance, please do not hestiate to contact our team at 07 5593 6060 or at [email protected].