Whether you are carrying on a business of trading cryptocurrency is often a complicated question and there are very few easy answers. Simply trading crypto assets regularly is not enough to be seen as carrying on a business. The ATO is particularly wary of people who reclassify their activities from investor to professional trader and will likely be cracking down on investors who believe their gains are tax free or only taxable when cashed back into Australian dollars.
This article has been prepared to assist clients in understanding the difference between an investor and trader for tax purposes, with the tests applied.
Investor v Trader
Crypto investors typically buy, sell, or swap crypto assets for fiat currency or another crypto asset with the intention of holding the asset for long term capital growth.
Conversely, a trader has the intention of buying and selling crypto for short term profits. Traders will have a strategy as to when to buy or sell, plan their trading activities, keep extensive records and trade repeatedly and in volume. Those carrying on a business will also often invest significant capital into their trading activities, however a lack of capital is not necessarily a decisive factor. They may also have registered a business, hired office space, paid for professional research and analysis and have kept extensive and well-maintained records in the event that an ATO review will be conducted into their activities.
The central difference for tax purposes is whether a trader is carrying on a business, or they are just making short term capital gains.
What is carrying on a business?
If you ‘carry on a business’ of trading, your profits are taxable as ordinary income. There are no special criteria for trading of crypto assets, shares or others, but the general criteria for carrying on a business is below:
- Whether you carry on your activities for commercial reasons and in a commercially viable way;
- If you undertake activities in a business-like manner. This includes preparing a business plan, acquiring capital assets, inventory in line with the business plan;
- Prepare accounting records and market a business name or product;
- Operating with an entity, such as a company or trust;
- Whether you intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term;
- An amount of repetition and regularity to your business activities.
Each of these criteria as weighed differently depending on the circumstances. The ATO is especially wary of traders claiming they carry on a business only to realise losses to use against their other income.
Tax treatment for investors
If you hold cryptocurrency as an investor, capital gains tax (CGT) will usually apply when you dispose the asset.
CGT is most commonly calculated on the difference between the cost you paid for the crypto asset which may include transaction fees, and the proceeds when you eventually sell it. Most importantly, the 50% CGT discount may be available if you held the asset for at least 12 months before you sell it, and if it is owned by an individual or trust – or a 33 1/3 discount for a superfund.
CGT is not a tax, rather it seems the profits calculated above are added to your income This means that if you are in the top marginal tax bracket due to other investment or employment, you will pay tax on your capital gains at 45% plus the Medicare Levy.
Tax treatment for traders
If a trader is carrying on a business, they will not be subject to the CGT rules for crypto assets involved with the business. Instead, the trading stock rules should apply. Effectively, your tax consequences are:
- Your profits are taxed as ordinary income;
- Any crypto assets you hold at the end of the year as trading stock will realise income according to their increase in value over the year;
- Any crypto assets you hold at the end of the year as trading stock should realise deductions according to their loss in value over the year;
The trading stock rules can be complicated and are beyond the scope of this article. There is a raft of tax benefits only available for businesses, including a crypto asset trading business:
- Claiming expenses: traders that carry on a business can claim related expenses to reduce profit, such as rent or interest on a mortgage (though this can affect your main residence CGT exemption), electricity, employment costs and others;
- Instant asset write-off: businesses can utilise the instant asset write off for equipment purchased for the business, most likely technology equipment for traders;
- Losses are deductible: losses you make on trading activity can be used to offset other income, though the ATO may scrutinise these claims;
- Corporate tax rate: The company tax rates of either 25% or 30% will apply to your business if you trade using a company, as opposed to the higher individual rates.
Specialist advice is recommended before you conclude you are carrying on a business of trading activities or not.
Carrying on a business of trading crypto assets is very difficult to define, as it is for share trading activities. Many traders seek specialist advice or sometime ATO private binding rulings to ensure their activities are enough to constitute a business for tax purposes.
It is possible to hold some assets as an investor, and others as a trader. Further, there are some grey areas with DeFi activities such as yield farming and liquidity pool strategies, and staking. The same tests apply to carrying on a business and we expect further confusion in this area until confirmed by the ATO. Adequate records are needed for any of these activities to support how you treat them for tax purposes and CryptoTax Calculator are a useful tool to document what you do.
The benefits of carrying on your trading activities as a business are attractive for some client, but it is imperative that you seek professional advice to confirm whether you are an investor or a trader – depending on which one you would rather be.