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Bitcoin Trader - trading stock

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Hi community,

 

Am in the process of gathering info so my accountant could prepare my tax return for FY18 and came across a 'trading stock' query.

 

I'm a bitcoin trader and this year the trading stock won't be an issue but moving forward, it could be.

 

Let's say this FY(19) I start with 1 BTC, trade it all year, make say a $100K profit and end the year with, again, 1 BTC.

 

Comes tax time, I'll need to pay income tax on the $100K profit. Fair enough.


But...

 

What if during that year the bitcoin price went from $7000 to say $70,000 or even $700,000? (anything can happen with these cryptocurrencies!)

 

Does 'trading stock' rule means I'll need to pay tax on this apprecation of the coin's price? That could force me to sell the coin just to be able to pay the tax :-S

'Trading stock' in crypto would make a lot of sense to me if it was only accounting for the difference in crypto amount, not only for the AUD value.


Example:

 

Start with 1 BTC and end with 1 BTC = no issue. Pay tax only on profit.

Start with 1 BTC and end with 1.3 BTC = trading stock rule applies on 0.3BTC.

 

Hope I got it wrong and the latter is how it works :-)

 

Am very keen to get your opinion on this matter.

 

Thank you and all the best,

James

 

 

 

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Best answer

ATO Certified

Devotee

Replies 2

Hi @James_F,

 

Thanks for your questions! There are a few things to consider when answering your questions: 

  • You mentioned that you're trading cryptocurrency. The term 'trading' may have a different meanings to different people - for tax purposes, if you're a 'cryptocurrency trader', then you are in business and undertaking your trades in a business-like way.
  • Generally speaking, businesses have certain characteristics in common:
    • You've made a decision to start a business and have registered a business name or ABN
    • You intend to make a profit (even if you won't in the short term)
    • You repeat similar activities
    • You activity, size and scale is consistent with other businesses in your industry
    • You act in a planned, organised and business-like way - for example, you keep business records, have a separate business bank account, have licenses or qualifications. This is not an exhaustive list, but can help explain what we mean by 'business-like'.
  • If you're trading your coins on exchanges as an investor, your crypto would be considered to be a capital asset, and the standard capital gains tax rules apply.

If you're not sure whether you're an investor or a trader, our early engagement team can talk with you about your situation and advise how we think tax would apply.

 

If you are in the business of trading cryptocurrency, we have a general guide to accounting for trading stock over on our website. The guide explains how to value your stock, general rules and using your trading stock for private purposes.

 

We also produce detailed guides on business income and deductible expenses you might find helpful when preparing your return.

 

Thanks!

 

 

8 REPLIES 8

Devotee

Replies 7

if you started with 1BTC and ended with 1BTC then the CGT would be cost base of the first Bitcoin, vs. the disposal price (what you traded to get your 1BTC back via crypto) / AUD cost price of the 2nd Bitcoin. 

if you made other money different to the price difference between 1BTC from date of purchae and second Bitcoin from date of trade/purchase.. (not its value right now, but when bought), then obviously you withdrew this in AUD... during the year... or you'd be carrying more BTC

in your accounts you will need every single traded for your accountant to add up your CGT. being the second year of trading and starting with 1BTC (which has already been paid tax on via the disposal price of what you paid to get it)... then when you sell that 1BTC... the price you got it originally for is your new cost base for the year (to deduct from your Capital Gain). 

the cost base of the first BTC is AUD, the cost base of the one you hold now is the price of 1BTC in AUD.... then when you start trading again, every trade determines capital gain over and above that cost base (when the 1BTC is sold partially or fully).

the change in price at the start of year and end of year in 1BTC... is evident by all your trading history... is what i'm saying. and it isn't an additional Tax.. on the 1BTC you now hold... this only comes into play as the cost base when figuring out your capital gain or loss when you start trading with it again in 2018/19

Initiate

Replies 6

Thanks, tree fairy, but I don't understand your reply :-(

 

Perhaps an example will help?

 

For simplicitly sake, let's say there was only 1 trade during the FY (although there were many, hence I'm classified as bitcoin trader)

 

1/7/18: 1 BTC holding. Price = $7000

Will sell it during the year for $10K, will buy back for $8K = made $2K profit before tax

30/6/18: 1 BTC holding. Price = $100,000

 

Now, I understand I'll need to pay tax for the $2K profit from trade.

 

But will I also need to pay tax for the appreciaition of the 'trading stock'? (i.e. tax on $100K-7K = tax on $93K appreciation?)

 

If so, that's really odd and would probably force me to sell the bitcoin, just to pay the tax :-(

Devotee

Replies 5

your BTC isn't worth 100k, that is a specualted value 'if you sold' the ATO only wants to know of the actual price when you dispose of it. this determines capital gain against the cost base of everything you traded for it in the first place.

in the case of the first BTC this is easy to figure out (your cost base/loss) 7000 AUD (if that is the price at the time you exchanged AUD for 1 BTC) ... in the case of the BTC you have now...your cost base... is every sale of cryptocurrency adding up to that 1BTC including the withdrawal and trading fees (as they are deductions from your capital, and thus reduce your capital gain).

to clarify the 'price while holding cryptocurrency' is a non-event... the capital gains event is when you 'dispose of cryptocurrency' as it is an asset, your capital gains need to be assessed and taxed.

If you made 50 trades or 2 trades, and never sold anything out to AUD (the bank)... and are holding 1 BTC and started with 1 BTC... then the 50 trades need to be recorded even if they detail the same capital gain of 2 trades.

we can assume the capital gain is pretty close to price of first BTC ((1/7/17) guessing you mean 2017) compared to the price 30/6/18 of one bitcoin.... but pretty close is only an estimate. the true value of your BTC on 30/6/18 is not the live price... (unless you're running a business and using a trading stock evaluation instead of Capital Gains)... the true value to the ATO on 30/6/18 is the cost base of all the component trades you did to end up with it. 

Sure you'd have been better not trading this financial year if you started with 1 BTC and ended with 1 BTC, all you did was generate a lot of fees for exchanges... but they will need records of the myriad trades you did in between A and B (bitcoin 1 vs bitcoin 1)... so to clarify the price of your bitcoin right now to the ato... is the (example) ltc you bought and sold back to it in march, the eth you bought with btc and sold back in april, the steem monsters you bought and sold in may, even if everything added back up to 1 BTC... it would just mean you're a bad trader and you had some fun. but to show your capital gains you'd need to put the price of disposal of that ltc, eth and steem... ... and this would be the cost base of your 1 BTC (not the price now)... for when you dispose of it for something else, to held determine and track your capital gains or loss.

everything you own in cryptocurrency is considered an asset... ltc is btc is eth to the ATO, you might be jumping from horse to horse but all they care to know is where you are in the % race... are you losing x % or gaining y % ? 

every trade is taxable is the misleading way of saying.. capital gains applies to cryptocurrency trading so give us all your trading records so we can see how x amount of coins became y amount of coins.. and value of x became value of y. that's all.

comparing what you spent on cryptocurrency and your cost base of what you hold now... is your capital gains... but they want to see the running total I guess... to help track your acounting and trading methods.

Devotee

Replies 4

your answer might be here: https://community.ato.gov.au/t5/Cryptocurrency/Assistance-on-Cryptocurrency-Tax/td-p/8417

CGT is applied to investors I think it says, whilst if you're running a business your crypto to AUD profit is income and your trading stock is evaluated somehow Smiley Tongue lol... tell me when you know the answer <3 i've been at this for 4 weeks now, 3 weeks of my holidays and i'm no closer to a resolution.

Initiate

Replies 3

To anyone reading this thread, I would highly recommend to completly ignore Tree Fairy's replies.

 

They are long, confusing, riddled with errors and absolutly provide no value :-(

 

If anyone that knows the answer regarding how the 'trading stock' rule applies to bitcoin traders could provide their insight, that would be great :-)

 

Thank you!

James

 

Best answer

ATO Certified

Devotee

Replies 2

Hi @James_F,

 

Thanks for your questions! There are a few things to consider when answering your questions: 

  • You mentioned that you're trading cryptocurrency. The term 'trading' may have a different meanings to different people - for tax purposes, if you're a 'cryptocurrency trader', then you are in business and undertaking your trades in a business-like way.
  • Generally speaking, businesses have certain characteristics in common:
    • You've made a decision to start a business and have registered a business name or ABN
    • You intend to make a profit (even if you won't in the short term)
    • You repeat similar activities
    • You activity, size and scale is consistent with other businesses in your industry
    • You act in a planned, organised and business-like way - for example, you keep business records, have a separate business bank account, have licenses or qualifications. This is not an exhaustive list, but can help explain what we mean by 'business-like'.
  • If you're trading your coins on exchanges as an investor, your crypto would be considered to be a capital asset, and the standard capital gains tax rules apply.

If you're not sure whether you're an investor or a trader, our early engagement team can talk with you about your situation and advise how we think tax would apply.

 

If you are in the business of trading cryptocurrency, we have a general guide to accounting for trading stock over on our website. The guide explains how to value your stock, general rules and using your trading stock for private purposes.

 

We also produce detailed guides on business income and deductible expenses you might find helpful when preparing your return.

 

Thanks!

 

 

Initiate

Replies 1

Thanks, Amanda! Really appreciate your knowledgeable reply :-)

 

Yes, am definitely considered a 'trader' for tax purposes so 'trading stock' rule will apply.

 

Upon reading the links you provided I discovered that I could value the stock at the end of the FY on 'cost basis' (which is fine) and not necessarily at 'market selling value' or 'replacement value' (which I was concerned of, as it could have terrible consequences as per the examples above).

All good.

 

Thanks for having this space to ask these questions :-)

 

Thanks again,

James

Devotee

Replies 0

well 'replacement value' EOFY/June30 vs. January would mean the capital gain you're reporting is far lower and closer to the truth. considering the cost base of crypto in January was 5x or more higher than it is now. using the 'cost base' method is the same as doing CGT without the trading stock method applied basically. but atleast your accountant can figure it out for you Smiley Very Happy

the benefit of trading stock method is to capture the massive depreciation in value of your assets since the plummet in January, if you go with the cost base method, you'l be valuing your crypto from when you disposed of something to get it, which was likely a much higher evaluation of your trading stock and thus capital gain. @James_F

 

lets say you bought 2 LTC on December 25th = 2 x 280USD, your capital asset value would be reported as 560USD.
where as the 'replacement value' you're dreading, would have you report 2 x 74USD on June 30

And FYI i'm definetly not posting because I know the answer, i'm here because I don't know ... and by expressing my understanding, i'm hoping someone more knowledge-able will correct me and thus guide my understanding to be more accurate or concise.

P.s. You have an ABN ? @James_F

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