You may have heard a lot of talk about cryptocurrency recently, particularly its investment potential. But if you’re new to the world of crypto, not even sure what it is, or are wondering how much tax do you pay on cryptocurrency, then it can be confusing to understand.
Ready to start investing? Make sure you get the right advice on managing your tax.
So, what is cryptocurrency?
If you don’t already understand cryptocurrency, then it can be quite a bit to get your head around.
Cryptocurrency is a form of virtual currency. Rather than physical currency, like notes and coins, it exists purely in the digital world, as a transaction on a digital public ledger. As it is underpinned by blockchain technology, this means that once the digital transaction is recorded, it exists forever. It’s secured by powerful cryptographic algorithms, making it almost impossible to counterfeit—hence the name.
What’s truly revolutionary about cryptocurrency is that it’s a decentralised payment system. Instead of being stored or governed by a single authority, these digital assets are spread across a global network of computers. This means it’s not governed by any one bank, government, or authority, and it doesn’t rely on banks to verify its transactions—that’s what the encryption does.
Cryptocurrency is stored securely in a digital wallet, and funds are exchanged between these wallets.
Who invented cryptocurrency?
The first cryptocurrency that ushered in the crypto revolution was Bitcoin. It’s the most well-known of all the potential 6,000+ cryptocurrencies available, and was founded in 2009 by a mysterious person (or some think a group) known as Satoshi Nakamoto. Nakamoto brought crypto to life in a whitepaper, where they outlined the concept and how it all worked. After creating the technology, and sharing its source code with the bitcoin community, they disappeared.
How do you buy and use cryptocurrency?
Here’s how it works:
To buy cryptocurrency, you need to set up a digital ‘wallet’.
You can do this by going to a digital cryptocurrency exchange, where you create an account. Your account will typically include a username and password, your personal information, and bank details.
You can then add real money to your account, which you can use to purchase cryptocurrency.
Cryptocurrency can be used in effect like real currency, to make purchases and payments online. As cryptocurrencies become more accepted, more and more businesses are starting to accept various forms of cryptocurrency as payment.
You can even now find cryptocurrency debit cards. They’re essentially debit cards that are linked to your crypto wallet, rather than your bank account. These cards utilise the major credit card networks, so you can therefore pay with crypto anywhere that your card is accepted. Most of these cards are only set up for Bitcoin, at the moment—but it’s likely that will change as cryptocurrency becomes more mainstream.
But crypto’s real power lies in investment. Much like regular investments, you’re purchasing an asset. This asset, while digital, can fluctuate in price as market demand changes. So if you play the market the right way, you can generate income from this investment.
Why are people investing in cryptocurrency?
There are many reasons why cryptocurrency is becoming a popular investment.
- The hype. People have managed to make big money trading cryptocurrency, and this has generated interest both online and in the real world. It’s being seen as the lucrative, exciting new investment opportunity, delivering strong growth in a short timeframe.
- It also has potential for long-term growth, much like a traditional investment.
- Some people invest as they’re excited by its volatility.
- Social media has played a big part in the buzz around cryptocurrency, attracting many big-name celebrities to its ranks.
- A big part of the current crypto boom is the fear of missing out. People see all the above reasons, and worry that if they don’t get on the bandwagon, they’ll be left behind.
While it’s underpinned by safe, secure blockchain technology, the main reason that people are investing is largely due to the hype around it all. They’ve heard stories of people making good money from their investments, and want to take part.
As cryptocurrency matures, it’s starting to be seen more as a realistic investment alternative.
However, while crypto itself doesn’t exist in a physical form, its tax obligations are very much real.
How the ATO works with cryptocurrency
Despite being a relatively new investment asset, the ATO has already put plans in place for how cryptocurrency is dealt with from a taxation point of view.
While it’s not governed by typical investment income rules, cryptocurrency is treated as property. This means that instead of regular income tax rules, it is governed by capital gains tax rules.
So when you sell any cryptocurrency, you’re taxed on the difference between what you bought it for, and its market value at the time of the sale. If your cryptocurrency has grown in value, you’re making a capital gain, and you pay CGT on the profit of the sale. You must declare this capital gain on your annual tax return.
If you make a loss on the sale, you’re required to report the loss on your tax return.
This also means that if you sell your cryptocurrency within 12 months of purchasing it, you’re required to pay tax on the entirety of your profit. So if you’re making big money on short-term crypto investments, you’re going to pay a lot of that back to the ATO.
Conversely, this also means that you can access exemptions on any capital gains tax generated by your cryptocurrency sale. So if you hold your cryptocurrency for more than 12 months, you receive the 50% discount, meaning you’re only taxed on 50% of the capital gain instead.
The final word
When investing in cryptocurrency, it pays to do your research and understand exactly what you’re getting into. While you may have been attracted by the mystery, the potential for large gains, or the fear of missing out entirely, it’s important to remember that it’s a real asset.
You’re going to pay real tax on any gains that you make.
And when you do, Liston Newton is here to help.