Working out whether you are a crypto trader or investor at tax time can be difficult. This guide focuses on the tax treatment of traders versus investors.
The line between cryptocurrency trading and investing can be blurry at certain time. The tax treatment of cryptocurrencies is constantly evolving, so it’s essential to keep up to date on the latest developments from the ATO in order to ensure you’re fulfilling your tax obligations.
A cryptocurrency investor typically obtains cryptocurrency and holds it for an extended period of time with the goal of capturing long-term gain. In contrast, a cryptocurrency trader will buy and sell cryptocurrency on a short-term basis with the goal of making profits over a shorter period of time.
In this article, we’ll take a look at the ATO’s definition of trader and investor to help you determine which classification you fall under.
ATO view on crypto trading & investing
The most helpful resource when attempting to define your crypto trading activities is the ATO’s “Shareholding as investor or share trading as business?” guide. From the ATO’s perspective, the tax treatment of shares — or, in this case, cryptocurrency — depends on whether you are considered to be holding crypto as an investment, or operating a business as a trader.
- The ATO determines the category you fall under based on several criteria:
- How much capital have you invested?
- How often do you trade, and at what volume? Repetition, regularity, and volume are taken into account when the ATO makes an assessment of your activities
- Are you attempting to generate profit? The nature of the activity you are conducting is taken into account by the ATO — if it looks like you’re running a business, you’re probably a trader.
- Is your organization structured and operated in a business-like manner? If your operation involves office premises, business accounts, and business registration, you’re likely to be defined as a trader.
Tax Treatment of Cryptocurrency as an Investment
If you’re not operating in a business-like manner, it’s likely that your activities will be classified as an investment. Cryptocurrency obtained as an investment is typically purchased by the individual, for the individual, or generated through hobby crypto mining.
If you dispose of cryptocurrency purchased as an investment, it’s likely that you will be required to pay capital gains tax on the disposal. If the disposal of the cryptocurrency generates proceeds higher than the cost base of the cryptocurrency, it’s highly likely that you will make a capital gain. For this reason, it’s essential to keep accurate records of trades and crypto disposal — if you don’t log this information, the ATO is likely to value the sold crypto at the market rate at review time, which could potentially be far higher than the sale price.
If an investor holds cryptocurrency for more than 12 months, they could potentially benefit from a significant capital gains tax discount. Should a trader have a net capital loss, it can be used to reduce capital gains in later years.
Tax Treatment of Crypto Traders
Cryptocurrency traders that buy and sell cryptocurrency over a short-term period for profit can be defined as crypto trading businesses. For these traders, profits are defined as part of their assessable income, which makes it possible to claim deductions on expenses.
Crypto trading businesses are subject to trading stock rules, which means the proceeds generated from the sale of cryptocurrency that is held as trading stock is classified as ordinary income. The cost of purchasing cryptocurrency held as trading stock can also be claimed as a deduction.
- To benefit from these rules, however, you’ll need to be classified as a business. The ATO defines a business as an operation that meets the following criteria:
- Operating with the intent to generate profit
- Keeping extensive accounting records
- Operating in a commercially viable manner for commercial reasons
- Operating in a strategic business-like manner
- Operating in a regular and repetitive manner
If you’re not sure whether the way you trade or purchase cryptocurrency is defined as a business operation or as an investment, it’s best to get in touch with a crypto tax returns expert in order to develop an effective tax strategy. To learn more about whether you are eligible for classification as a crypto trading business, get in touch with Fullstack today.