Cryptocurrency Trading and Investing – You need to know the difference

Determining whether you are a cryptocurrency trader or investor for tax time can be tricky. To help you work out which category you belong to, and to make your tax return a little easier, this guide will provide an overview of the tax treatment of traders vs investors. 

Cryptocurrency trading and investing involve similar activities so it can be hard to draw a line between the two. Though, the tax treatment of cryptocurrencies is constantly changing, so it’s essential to remain up to date on the latest developments from the ATO to ensure you’re fulfilling your tax obligations effectively.

So, let’s define the two.  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. On the other hand, a cryptocurrency investor typically acquires cryptocurrency and holds it for extended periods of time to capture long term gain. This guide will look at the ATO’s definition of trader vs investor to help you to understand which classification you fall under.

ATO’s Perspective on Cryptocurrency Trading and Investing

The ATO’s view on tax treatment of shares or cryptocurrency depends on whether you are considered to be operating a business as a trader or holding crypto as an investment. The best resource to assist you to accurately define your crypto trading activities is the ATO’s 2017 guide “Shareholding as investor or share trading as a business?”.

As highlighted in their guide, the ATO determines the category you fall under based on the following criteria:
– How often do you trade, and at what volume?
– Are you trying to generate profit? The nature of the activity you are engaged with is considered by the ATO – if it appears you are running a business you will probably be defined as a trader.
– Is your organisation operated in a business – like manner? If your business involves office space, business accounts and business registration, you’re also likely to be defined as a trader.
– How much capital have you invested?

Tax Treatment of Cryptocurrency Traders

Traders who buy and sell cryptocurrency over a short – term period to generate profit are defined as crypto trading businesses. In this case, the traders profits are defined as part of their assessable income, which makes it possible to claim deductions on expenses.

Cryptocurrency businesses must adhere to trading stock rules. As a result, the proceeds created from the sale of cryptocurrency that is held as trading stock is considered ordinary income. The cost of buying cryptocurrency held as trading stock can also be claimed as a deduction.

However, in order to benefit from these rules, you’ll have to be classified as a business. The ATO’s definition of a business is a company that meets the following criteria; operating to generate profit; retaining extensive accounting records; operating in a commercially viable manner for commercial reasons; operating in a regular and repetitive manner and operating in a strategic business – like manner.

Tax Treatment of Cryptocurrency Investors

If your cryptocurrency activity is not being conducted in a business – like manner, it is likely that you will be classified as a crypto investor. Cryptocurrency obtained as an investment is essentially purchased by the individual, for the individual or acquired through hobby crypto mining.

If you choose to dispose of any cryptocurrency purchased as an investment, it is likely you will be required to pay capital gains tax on the disposal. In this case, if the disposal of the cryptocurrency generates proceeds higher than the cost base of the cryptocurrency, you will most likely make a capital gain. Hence, it is essential to keep accurate records of trades and crypto disposal – if you fail to 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.

Additionally, if an investor holds cryptocurrency for more than 12 months, they could possibly benefit from a significant capital gains tax discount. Though, if a trader has a net capital loss, it can be used to reduce capital gains in the future.