World is changing and everything around us is changing so fast that we can barely plan for the next vacation. These days pretty much ANYTHING can happen. Despite the COVID and Lockdowns, some businesses been quite successful over the last 2 years. Some even had the highest profits over the last 5 -7 years. This relates to creative industry as well. Businesses like dancing or performance art schools got hit by the lockdowns, filming industry or any business which was able successfully move their goods and services online on the other side, was able to thrive with full potential. At the same time the lockdowns changed our lives dramatically and made people think about alternative ways of income. One of those possibilities is crypto and this is what I wanted to discuss today.
As many of you may know bitcoin was born in 2009. I didn’t even hear about it during that time. But even people who heard or bought it in 2009 didn’t have much faith in it, up until it is all blew up in 2017 and then in 2021. Last year my inbox was flooded with emails inviting me to invest into crypto.
I got curious and start talking to people and making my own research to understand what it is and how hard it is. I read number of books, multiple articles and research papers. I bought different crypto currencies and opened up number of accounts with different exchanges to realise that crypto is quite technical and not really user friendly. It requires a lot of research and dedication.
But at the same time, it is quite fascinating market and if you are dedicated enough, you can get very successful in it.
I was particularly drawn to non-fungible tokens (NFT). I looked at the market to find out countless work arts which were impressive. Some were very expensive. And I thought whether it is a new platform for creative artists to create and be rewarded? But let me briefly explain what NFT is? Non fungible token is something that you can exchange for something. For example, you can exchange AUD50 cash for AUD50 cash, or 50c to 50 c, these are all fungible (equal). But if you want to exchange an old, limited edition antique painting it would be hard to find an equal item (so its non fungible). NFT can be work of art, film, comedy, TikTok video. Once you uploaded it onto blockchain, your digital art becomes a token with the uniquely assigned ID to it. So, you can track it from anywhere with an audit trial. That’s how you know it’s yours and not someone’s copy. Of course, it’s not that simple as one, two, three steps but it is an option to keep art alive in digital world.
I tried to look at crypto currency from 2 different angles. One as an actual owner and what I need to learn and understand to be able to manage it; second as a bookkeeper and how can I add value to my clients by researching and understanding current accounting and tax treatments.
Firstly, because something has a value it is a CGT asset. Bitcoin or other crypto currency would be treated as a CGT asset for tax purposes. Therefore, if you are going to sell any coin or token it will create a CGT event.
There is a complexity with how you report CGT asset, which requires you to consider gas fees, how did you acquire tokens etc. However, it also allows you apply 50% discount if you hold those assets for more than 12 months.
CGT applies to Crypto when:
- Converting one crypto to another crypto
- Selling or gifting crypto
- Selling for cash, or
- Buying goods and services for crypto
The problem arises when you need to calculate all your capital gains/losses. That’s where you need to use special crypto currency web tools (for example Koinly or Crypto Tax Calculator or contact to crypto adviser).
There are differences in being an investor or carrying on a business trading crypto. When carrying on a business, its usually a short-term investments, small business concession can apply as well as instant asset write off. However, you won’t get CGT discount and you more likely apply for corporate tax rate (25%) or if turnover more than $50m – 30%.
When acting as investor, you usually buying or selling cryptocurrency for fiat money or stable coins, seeking long term profits, and having on average 30-40 transactions per month. Investors can apply for CGT 50% discount if holding a crypto asset for more than 12 months and they will have CGT tied to their personal marginal tax rate. Important to note that if at one point you decide to change from investor to business trader, you can trigger GST event K4, you need to be careful around it. It’s always better to approach a tax specialist in crypto who can provide a proper advice.
Lastly, I wanted to cover staking and airdrops. Staking is when tokens are sent to an individual as some sort of reward. Staking refers to an interest earned on a deposit of crypto or something similar. Basically, you deposit your tokens to the crypto exchange platform, and they lend it to others while you are earning interest on it – that is called staking (the easiest way to understand the principle without getting into terminology if we refer this concept to term deposit concept). The airdrops are basically free cash rewards for doing things. The way you can get airdrops is when for example exchange (binace, coinspot) send you free airdrops as a reward for joining that exchange. Or when a new project sends tokens as airdrops to new users to encourage them to use their product.
ATO sees staking and airdrops as an ordinary income, however there are lots of nuances. For example, in UK, the lending of crypto currency and getting interest on it treated as a capital event as in tax office’s view it’s a disposal of the asset.
If you receive an airdrop on an established token that will be treated as ordinary income.
As you can see from a tax perspective crypto currency can get complex, especially if the coins you have invested became 10x more than it worth initially. But if you do enough research and engage tax and crypto advisors from the beginning, that investment can bring a great reward which may help you to utilise those funds in your business and even attract a younger demographic.
