Investing in Crypotocurrency - let's take a closer look at the risks and tax implications


There is so much to understand about Cryptocurrency. Even financial industry experts like us here at Rowe Partners can find it challenging. It’s so complex when compared to the simplicity of cash. Now before you read on, let’s give this warning right from the outset. Prior to investing in any digital assets, be sure to seek specialist advice and trade only through a reputable currency exchange. We can certainly help you work out the tax implications of your investment decisions but the decision to invest in Cryptocurrency in the first place, must be entirely yours and based on a thorough examination of the risks and opportunities.


So, what is Cryptocurrency? Cryptocurrency is a virtual currency that exists only in digital form (digital asset) distributed across many computers, secured by a type of encryption or coding known as cryptography. This process protects the currency, making it almost impossible to counterfeit. This combined with limited releases enables it to hold value. There are several types, the most common being Bitcoin. There are only 21 million Bitcoins in existence. As of February 24, 2021, there were only 2.363 million to be circulated. At the time of writing, 1 Bitcoin is valued at $65,253.98 AUD! Some are tipping that by 2030, one Bitcoin could be worth as much as $500,000. A M A Z I N G! Other cryptocurrencies include Bitcoin Cash, Litecoin, Ethereum, Ripple, Stellar, NEO and Cardano.


Cryptocurrency sits outside traditional, centralised financial authorities which theoretically protects this type of currency from interference or manipulation by governments. To go into more detail than this here would not be useful. We’re not providing financial advice through our blogs, simply discussing interesting subjects and current affairs. Investment decisions must be fully considered and based on specialist, tailored advice. If you’re actively investing or seeking to invest in cryptocurrency, you’re probably already (or should be) across more of the detail.


Rowe Partners recommendation is always that investors should have a thorough understanding of any investment product; it’s risks and potential rewards as well as it’s capacity to deliver on their financial objectives before parting with any of their hard-earned! The wild, daily fluctuations in price of cryptocurrencies should be enough to put all but the most mega rich adrenaline seeking and tech savvy investors off. It’s volatile, high risk and often attracts dodgy fraudsters and scammers. It’s also known to be commonly traded through the dark web by computer hackers, money launderers, terrorist groups and other criminals. Cryptocurrency exchanges are also prone to hacks. The stories of investors scammed and burned are many and increasing. The ACCC warns that Australians are losing more and more money to Ponzi Schemes using Cryptocurrency. Read more here;

Another consideration is the protection of digital assets. Safe storage of digital assets is challenging but its portability and difficulty to trace also makes it easy for those inclined, to steal it or hide money from government agencies. Ultimately, cryptocurrency’s value as a long-term asset will depend on perceived scarcity, safety and wide scale adoption by ordinary people.


Despite the risks, over the last few years, investing in cryptocurrency has been gaining traction with ordinary people seeing it as an investment opportunity with the potential to make fast money i.e., as an investment. More and more businesses now also accepting Bitcoin as a form of payment for Goods and Services. It's circulating.


Tesla’s Elon Musk recently purchased $1.5 Billion (US) of Bitcoin and now plans to allow people to buy their products using it. This decision caused a bit of a buying frenzy and a temporary surge in value. It’s worth noting the company’s stock price dropped 30% soon after and he’s tipped to make a significant loss. Musk has attracted flack for this decision too with many seeing the purchase as a gamble. Bottom line is that he is a high roller and can personally afford to play at the table. However, Tesla shareholders might not like the fact that he’s been playing with their money.


Interestingly too, a share investing service that Chad McKnight has followed for 7 Years recently invested some of their own money in it. On the surface of it, cryptocurrency seems to be gaining legitimacy in investment circles so Chad’s wondering if it’s time he changed his view on Bitcoin. So far though, he’s not been prepared to take the risk.


Tax Implications


In the last few weeks, Chad has had 2 clients ask about Bitcoin and about the tax implications on the sale. The bottom line is that if you make a capital gain on the sale of a Bitcoin or other cryptocurrency investment, the Australian Government requires you to pay Capital Gains Tax (CGT) on it.


Bitcoin is like any other investment and any gains you make on it will be taxable. If you’re a business buying and selling goods in Bitcoin well you will just pay tax on it as ordinary income just like you would if you were trading in cash. If you are buying it and holding it to sell at some future point in time you will have a capital gain and capital gains tax maybe payable. CGT is quite complex and even more so when dealing with cryptocurrency so it's best do your homework and talk to your accountant and financial advisor prior to investing.


A quick search on the ATO’s website outlines under what circumstances a CGT event occurs when dealing with cryptocurrency. A disposal can occur when you:

  • sell or gift Cryptocurrency.

  • trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency)

  • convert cryptocurrency to fiat currency (a currency established by government regulation or law ), such as Australian dollars, or

  • use cryptocurrency to obtain goods or services.

As with any capital assets the rules are quite complex and sometimes the timing of when you trigger a capital gain can be important. Delaying a sale by as little as 1 day could reduce the CGT by half.


View the ATO website information here https://www.ato.gov.au/general/gen/tax-treatment-of-crypto-currencies-in-australia---specifically-bitcoin


If you do have Cryptocurrency and are unsure about the taxation consequences, call one of our accountants today on 1800 04 7693.

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Rowe Partners Pty Ltd (ACN 105 365 688) as an agent for Rowe Partners Partnership (ABN 65 250 711 759). Directors: R P McDonald FCPA, C R McKnight FCPA, P J Connolly MIPA, F B Cammarano AIPA, M R Nutt CPA. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees.

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