For accountants, cryptocurrency is about more than just adding, subtracting and coming up with a profit-and-loss statement for clients.
Public Accountant spoke to three cryptocurrency experts to help its members understand the intricacies of dealing with the newest infiltrator into the wealth market.
Danny Talwar is head of tax for Koinly, which supplies tax software to cryptocurrency investors and accountants, Maryna Kovalenko is co-founder of Kova Tax, and CryptoTaxCalculator, in collaboration with Coinspot, is an Australian crypto and bitcoin exchange.
Receiving cryptocurrency assets as payment for services
Maryna: The bigger question here is should you accept cryptocurrency payments in your business as payment for goods and services.
Accepting cryptocurrency has many advantages but some common ones revolve around the following:
- Decentralised – cryptocurrency is not controlled by any centralised bank, making it a straightforward peer-to-peer payment with no middleman.
- It’s borderless – payments can be sent and received anywhere in the world almost instantly.
- It’s immutable – cryptocurrency data is stored within complex encrypted networks making it unchangeable. In computer science, an immutable object is an object whose state cannot be altered.
Businesses not only need to consider whether accepting cryptocurrency is the right fit for their business but also the tax implications they may face.
Receiving cryptocurrency as payment for goods and services provided by businesses is considered as ordinary income for the business. The value of the cryptocurrency is worked out at the time you make the sale and receive the cryptocurrency asset in exchange.
However, businesses need to think about their business plan and centre their cryptocurrency payments service around it. Important questions to consider for tax purposes could be:
- Does the business plan to hold onto the cryptocurrency received or convert it to cash?
- Will the conversion happen immediately or on a scheduled basis?
- Does the business use cloud-based software like Xero, MYOB, and IPA Books+ for accounting and if so, how will the point-of-sale system from the business integrate with the cryptocurrency payment’s location?
Such considerations can have significant implications for your business and income taxes. Holding onto cryptocurrency assets received as payment can significantly affect business cash flow as price fluctuations mean the value of your cryptocurrency asset could rise or fall in the short term.
Coinspot: In Australia, receiving crypto as a payment in return for goods or services is treated as ordinary income for tax purposes. Let’s say hypothetically as part of your salary package, you receive 3 bitcoin per month. For your January income payment, when you receive the 3 bitcoin, they are worth a total of $1,500. You’ll have to pay income tax on this amount and any other tokens earned as part of this agreement according to your income tax bracket.
For reporting purposes, you will need to include the equivalent value of the assets earned in Australian dollars at the time of receipt. This forms the value of what you’ll have to declare as part of your ordinary income. After this point, the received amount becomes its own capital asset subject to future capital gains tax. The value in Australian dollars at the point of receipt forms the cost basis for any future CGT events. CryptoTaxCalculator gives individuals the option of categorising transactions as income.
Sending cryptocurrency assets as payment for goods and services
Maryna: The other end of the spectrum to the transaction is when consumers or businesses pay for goods and services with cryptocurrency.
By holding cryptocurrency assets in their personal or business wallet, a business or consumer can pay for goods and services with a direct transfer. At the time of the transaction, this is considered a disposal of their cryptocurrency asset. This means tax consequences.
Paying in cryptocurrency triggers a capital gain or loss on the underlying asset used in the transaction for investors. The capital gain or loss would be determined by working out the difference between the original cost of the cryptocurrency asset and market value at the time of the transaction i.e., when you pay for the goods or services.
Businesses would likely record a deduction for the market value of the cryptocurrency payment made in their business accounts if it is for running expenses or goods. If their cryptocurrency is a trading stock asset, then the business would also calculate the cost of goods sold for the particular asset at the time of payment in cryptocurrency.
Once a cryptocurrency payment goes through, it is permanent.
Cryptocurrency’s irreversibility impacts business owners in different ways. Transactions can only be refunded by the party receiving the funds so businesses accepting cryptocurrency should be prepared for the possibility of dealing with customer refunds and additional record keeping. They would also have to warn their clients that if they transfer cryptocurrency to an incorrect address, the business won’t be able to receive it or do anything about it, so it will be treated as still unpaid.
Coinspot: If the user is considered a trader and/or investor, then typical CGT rules apply as sending crypto as payment is seen as a transfer of beneficial ownership. This means that any time you send crypto to an address you do not own, the ATO will likely ask you to pay capital gains tax on any perceived profits from the disposal. There are some personal use rules that negate capital gains tax, but the requirements to have an asset considered as such are stringent.
If the user is considered a business, then trading stock rules apply, rather than the typical CGT rules. If disposing of cryptocurrency is part of an individual’s business activities, then:
- The cost of acquiring cryptocurrency held as trading stock is deductible.
- Sales made are accessible as ordinary income, not as a capital gain.
Changes in the value of trading stock held at the end of the financial year may need to be reported.
Protecting your cryptocurrency portfolio and transactions
Maryna: Many investors buy cryptocurrency on an exchange and choose to keep their cryptocurrency on that platform. Although these digital exchanges exercise safety precautions to prevent thefts, they are not completely immune to hacks.
Danny: The recent news of borrowing and lending platforms filing Chapter 11 bankruptcy has seen a flight of crypto funds from centralised exchanges.
Custody of crypto assets can be done via cold wallets such as Trezor or Ledger devices, where private keys are held offline and intended for longer-term holding (or HODLing).
Alternatively, crypto assets can be stored on exchanges where users can easily get set up in minutes and transact immediately. Crypto keys can also be stored on hot wallets, including mobile wallets or browser extensions. In this case, hot wallets refer to the fact that funds are at a higher risk on devices with a constant internet connection and the increased risk of having funds stolen.
For accountants, getting the complete picture of a client’s taxes is essential. Keeping track of where clients hold their cryptocurrency may be a struggle even for them, hence the importance of record keeping.
Coinspot: There are several measures you can take to help protect your crypto assets.
Use two-factor authentication for your accounts.
When using a non-custodial wallet, be sure to back up your seed phrase correctly. It is important that customers keep a record (preferably a physical backup) of their seed phrase and keep that record strictly private. If you ever lose access to your wallet, whether because you’ve forgotten a password, or someone has hacked it, you can use your seed phrase to regain access.
Use a strong password, definitely one that you don’t use on any other platforms.
Always ensure you are checking the URL of the website you are interacting with: phishing websites are set up with the sole intention of mimicking trusted sites in order to gain access to individuals’ sensitive details, such as usernames and passwords. When you are searching for something specific online, always double check the URL to confirm you are dealing with someone legitimate.
Avoid transacting on public Wi-Fi: a private, secure connection that you trust is always preferable when trading crypto assets, as you can be sure that you’re in control.
Taxation of cryptocurrency portfolios
Maryna: The taxation of cryptocurrency assets is typically as capital assets or ordinary income. Ultimately, the tax treatment depends on the underlying digital asset transaction – the way the taxpayer uses them or transacts with them, the intention of the taxpayer and any rights or obligations attached to the cryptocurrency asset.
The most common use of cryptocurrency is usually as an investor where a taxpayer acquires and holds the asset with the intention of making a financial profit on disposal and building wealth over time.
In such situations, the cryptocurrency assets are taxed under CGT rules, where the disposal of the cryptocurrency asset is seen as a CGT event.
Alternatively, taxpayers who engage in mining or trading cryptocurrency assets in a “business-like manner” may be considered traders and thus be subject to ordinary income tax rules.
Businesses transacting in cryptocurrency assets will need to account for them as either trading stock or ordinary income. Businesses can hold and use cryptocurrency assets in the following ways:
- for the purpose of exchanging goods and services in the ordinary course of business. In which case, the cryptocurrency assets are treated as trading stock;
- in carrying on a crypto asset business (crypto trading, mining, or selling non-fungible tokens). In these cases, the cryptocurrency assets are also treated as trading stock; or
- hold cryptocurrency assets as an investment, in which case the CGT rules would apply.
Taxation Ruling 97/11 outlines key criteria in determining whether the taxpayer is in business and is outlined as follows:
- whether the taxpayer has the intention to make a profit from the activity;
- the amount of capital investment in the activity and its source;
- the size and scale of the activity in comparison to similar activities in the same industry;
- the repetition and regularity of the activity;
- whether the activity is carried out in a business manner (such as keeping business records, bank accounts, trading strategy, professional advice, relevant education, equipment, registrations, office rent, and so on).
In certain circumstances, it may be possible to be both a trader and an investor. A common example would be a businessperson that owns a crypto mining business but also holds cryptocurrency investments. In such cases, the businessperson would need to report their investing and trading transactions separately and isolate both activities and records separately as well.
Danny: Whilst crypto assets can be many things, they are not foreign currency in the ATO’s eyes. However, the adoption of crypto as legal tender in countries such as El Salvador blurred the lines between crypto being an investment asset and foreign currency.
This implication is significant as Division 775 applies revenue-based treatment for foreign currency gains or losses. Treasury released a statement before 30 June reiterating the ATO’s view that “cryptocurrencies will continue to be excluded from foreign currency tax arrangements under the Albanese government”.
Accountants need to understand the intentions of crypto investors when using digital assets, as the ATO has not yet considered more complex transactions.
If you are an accountant, ask your clients if they have crypto upfront! There are plenty of horror stories about clients disclosing crypto holdings at the 11th hour, which can be a nightmare to track and record.
Use software to track taxable events, purchase, sale and transfer history – an excel spreadsheet will be inefficient and can take many hours.
What’s next:
Maryna: Whilst we wait for the Board of Taxation official materials on their review of the tax treatment of digital assets and transactions in Australia, and better guidance from the ATO, taxpayers should get a good understanding of blockchain technology and possible tax consequences to reduce uncertainty on the matter and seek professional advice for tax clarity.
Danny: Regulation for digital assets is coming. Taxation is only one facet of regulation, and we’ll likely see an increase in regulatory activity over the coming months and years. The RBA is exploring the use of Central Bank Digital Currencies – a blockchain-based Australian digital currency issued by the reserve bank.
On the tax front, there is more work to be done. The ATO’s guidance is limited and must be reconsidered in the context of how crypto assets are evolving.
