28 November 2018

Cryptocurrency and tax – determining the ‘market value’ of cryptocurrency

For various reasons, those who regularly transact and trade in cryptocurrency will often use exchanges that are based offshore. Importantly, these exchanges will rarely quote the value of cryptocurrency in Australian dollars.

In the first article of this series, we discussed the tax implications of cryptocurrency to cryptocurrency transactions. The important message was that each crypto-to-crypto transaction will generally give rise to a taxable event.

In the second article in this series, we discussed the ATO’s expectations in relation to record keeping for cryptocurrency transactions. The important message is that the ATO expects people who trade in cryptocurrency to keep complete records of their transactions.

However, keeping good records is not enough. When it comes time to prepare your tax return, you will not only need to rely on your good records but also calculate any gains or losses that have been made. This can be difficult where you are trading through an exchange that doesn’t quote the value of cryptocurrency in Australian dollars.

This article, which is the third in the series, briefly discusses methods for determining the value in Australian dollars of cryptocurrency at a particular point in time.

Stay tuned for our final article in this series, which will discuss the tax implications of hard forks.

Converting to Australian currency value

Whether you are holding cryptocurrency on capital or revenue account, a critical question becomes how to calculate the Australian currency value of a cryptocurrency at any point in time. Subject to some exceptions, Australian tax law requires that gains and losses are to be reported in Australian currency.

A sensible method for determining the value of cryptocurrency, in Australian dollars, at a particular point in time would be:

  • if the exchange rate is quoted in Australian dollars, the rate from a reputable digital currency exchange, or a reputable digital currency website; or
  • if the exchange rate is only quoted in foreign currency:
    • choose an exchange rate with an amount expressed in a foreign currency from a reputable digital currency exchange or a reputable digital currency website; and
    • on the same day, convert the amount expressed in foreign currency into Australian dollars.

The ATO has released a determination that adopts this methodology in the context of GST. Further, the ATO also provides daily foreign exchange rates on its website.

In any event, subject to market movement, there may be little gain or loss where one cryptocurrency is purchased and disposed of in a short period of time to purchase a different cryptocurrency. A common example would be the purchase of Bitcoin for immediate use to purchase an ‘altcoin’.

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