The Australian Taxation Office recently updated its guidance on tax and cryptocurrency.
In early November, the Commonwealth Bank announced that it is now Australia’s first bank to offer customers the ability to buy, sell and hold crypto assets, directly through the CommBank app. You know when the banks come on board, cryptocurrency has become normal.
But cryptocurrency is only one part of the blockchain universe. Non-fungible tokens or NFTs (fungible means interchangeable) are one-of-a-kind digital assets that are part of the Ethereum blockchain. An example is the CryptoKitties game that allows players to purchase, collect, breed, and sell unique virtual cats – and, before you laugh, the game transacted over $1 million in virtual cats in its first few days of launching.
NFTs are also rapidly rising in popularity in the art world because ownership of the asset is on the blockchain and in some cases, the artist can take a percentage of every transaction of that artwork – so, no more starving artists because they can generate an income from the asset over time not just on the first sale. A stellar example is the sale of an NFT artwork by the digital artist Beeple, which was sold at auction by Christies in March 2021 for $69 million (USD).
Let’s look at what the Australian Taxation Office has to say about some of the commonly asked questions about the implications of investing in blockchain.
If you receive crypto from providing services to others, this can represent income. If you create crypto, you acquire a capital gains tax (CGT) asset. A taxing event will arise when you exchange crypto for Australian Dollars or another crypto asset.
The ATO is using various sources for data collection including digital service providers (DSPs) and analysis software to track taxpayer compliance. There are several data-mining projects (no pun intended) underway looking specifically at cryptocurrency and cryptocurrency platforms.
You may be able to claim a capital loss if you lose your cryptocurrency private key or your cryptocurrency is stolen. Generally, where an item can be replaced it is not lost. A lost private key can’t be replaced. Therefore, to claim a capital loss you must be able to provide the following kinds of evidence:
Unfortunately, it’s unlikely mining for fun will allow you to avoid tax. The circumstances where you can generate cryptocurrency or transact it without paying tax are very limited.
If you are in the business of mining, then you can claim a deduction for the equipment you purchase to generate income. If you are not carrying on a business, then the crypto is held as an investment and the equipment is not deductible.
As with any other cryptocurrency, an NFT can be held for personal use. Personal use assets are CGT assets that you keep mainly for your personal use or enjoyment.
NFT is not a personal use asset if it is kept or used mainly:
The relevant time for working out if an asset is a personal use asset is at the time of its disposal. During a period of ownership, the way that an NFT is kept or used may change (for example, NFTs may originally be acquired for personal use and enjoyment, but ultimately kept or used as an investment, to make a profit on ultimate disposal or as part of carrying on a business).
The longer an NFT is held, the less likely it is that it will be a personal use asset – even if you ultimately use it for personal use or consumption.
Capital gains you make from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses you make on personal use assets are disregarded. Collectables are not classed as personal use assets and may be subject to CGT.
The issue is not so much can you acquire cryptocurrency within an SMSF, but should you? The June 2021 ATO statistical report shows that Australians held approximately $212m in cryptocurrency assets as of 30 June 2021- only 0.03% of total assets. The simple reason is that the volatility of cryptocurrency makes it harder to rationalise under Section 62 of the Superannuation Industry Supervision (SIS) Act, particularly if the asset allocation ratio of cryptocurrency assets in the SMSF is high. But, it’s not impossible if managed correctly at an investment and administrative level.
With Bitcoin as low as $14k on 13 September 2020 and $61k on 12 September 2021, it’s easy to see the appeal for investors with the appetite for risk (335% return across 12 months). In this same period, Ethereum grew 767%. But the world was in a different place in September 2020, not just in cryptocurrency.
Before investing in cryptocurrency, there are a few things SMSF trustees need to be aware of:
The ATO also suggests you look at the diversity of the SMSF’s investments.
How tax applies to blockchain and the generation of income or assets is still a work in progress. Please contact us if we can assist.