It is necessary to maintain good records for all transactions with cryptocurrency, whether you’re using cryptocurrency, for personal use, in business or as an investment.

You are required to keep track of the following records for all of your cryptocurrency transactions:

  • every transaction date
  • the cryptocurrency value in Australian dollars at the time of the transaction (which can be captured from a reputable online exchange)
  • record of what the transaction was in relation to and who the other party was (even if it is only their cryptocurrency address).

The types of records you should keep are as follows:

  • receipts of purchase of cryptocurrency or transfers
  • exchange records
  • agent, accountant and legal costs records
  • records from digital wallet and keys
  • software expenses relating to managing your tax affairs

Retaining good records for cryptocurrency dealings will make it much simpler to calculate and meet tax obligations. If you are in business, having your record keeping accurate and up to date will assist you to manage your cash flow and give you a clear view on how your business is doing.

You can use the services of an accountant or third-party software to assist in meeting your record-keeping obligations and calculating your tax.

Theft or loss of cryptocurrency

If you lose your cryptocurrency private key or your cryptocurrency is stolen, you may be eligible to claim a capital loss.

In this situation, the problem is likely to be whether the cryptocurrency is lost, whether you have lost proof of your ownership, or whether you have lost access to the cryptocurrency.

In general, where an item can be replaced it’s not lost. A lost private key cannot be replaced. Consequently, to claim a capital loss you need to be able to provide the following types of evidence:

  • the wallet address that the private key connects to
  • when you obtained and lost the private key
  • the expense incurred to obtain the lost or stolen cryptocurrency
  • the total amount of cryptocurrency in the wallet at the time of loss of private key
  • that the wallet was controlled by you (for example, transactions linked to your identity)
  • that you have possession of the hardware that stores the wallet
  • transactions to the wallet from a digital currency exchange for which you hold a verified account or is linked to your identity.
Exchanging cryptocurrencies

If you get rid of one cryptocurrency to obtain another cryptocurrency, you dispose of one CGT (Capital Gains Tax) asset and acquire another CGT asset. Because you receive property rather than money in return for your cryptocurrency, the market value of the cryptocurrency you get needs to be accounted for in Australian dollars.

If the cryptocurrency you received is unable to be valued, the capital proceeds from the disposal are calculated using the market value of the cryptocurrency you disposed of at the time of the transaction.

Example 1

On 6 July 2017, Amanda acquired 100 Coin A for $15,000. On 16 November 2017, through a reputable digital currency exchange, Amanda traded 20 of Coin A for 100 of Coin B.

Going by the exchange rates on the reputable digital currency exchange at the time of the transaction, the market value of 100 Coin B was $6,000. For the purposes of working out Amanda’s capital gain for her disposal of Coin A, her capital proceeds are $6,000.

Holding cryptocurrency as an investment

If you obtain cryptocurrency for an investment, you may need to pay tax on any capital gain you make upon disposal of the cryptocurrency.

You will make a capital gain if the capital profits from the disposal of the cryptocurrency are greater than its cost base. Even if the market value of your cryptocurrency was to change, you don’t make a capital gain or loss until you dispose of your crypto.

If you are holding the cryptocurrency as an investment, you won’t be eligible for the personal use asset exemption. Although, if you keep your cryptocurrency as an investment for 12 months or more, you may be eligible for the CGT discount to lower a capital gain you make when you dispose of it.

In regard to net capital loss, you can use the loss to lower a capital gain you make in a future year. You cannot deduct a net capital loss from any other income you receive.

You need to keep records of every cryptocurrency transaction to calculate whether you have a made a capital gain or loss from each CGT event.

Example 2

Greg is a long-term investor in shares and has an array of holdings in numerous public companies in a stable portfolio of high and low risk investments. Some of his holdings have been income producing and some are not. He changes his portfolio frequently on the advice of his adviser.

His adviser recently informed Greg that he should invest in cryptocurrency. On that advice, Greg purchased several different cryptocurrencies which he added to his current portfolio. Greg doesn’t know a great deal about cryptocurrency but, as with all of his investments, he alters his portfolio every now and then in accordance with appropriate investment weightings.

If Greg sells some of his cryptocurrencies, any profits would be subject to CGT because he has obtained and held his cryptocurrency as an investment.

Should you need to chat about the record keeping of your cryptocurrency, please contact our cryptocurrency tax team on (03) 5970 8100.