The concept of Cryptocurrency is intimidating to most. While the world is full of “self-proclaimed” Crypto experts, it is still difficult to gain a tight grasp on what it actually means in laymen’s terms.
To put it simply, Cryptocurrency is a form of digital money. It is often referred to as “coins” which are secured through cryptography (the enciphering and deciphering of messages in secret code). Essentially it removes the middleman altogether to allow for a faster, cheaper, and more discreet transfer of “money”.
With the innovation of Crypto, we may be able to remove banks and other centralised middlemen completely. This is because cryptocurrencies rely on a technology called blockchain which is decentralised, meaning no single entity oversees it.
A blockchain is:
“A cryptographically protected distributed ledger made up of blocks that contain transaction history. As the blockchain grows longer and longer, it becomes increasingly difficult to alter older transactions.”
Essentially it is a way of recording information that makes it difficult to hack or change. It stores data in “blocks” that are then chained together. Think of it like an incredibly difficult to read book of receipts.
How are these currencies created you ask?
Through a concept known as Mining. This is how new cryptocurrencies (e.g Bitcoins) are generated and supply is controlled by an algorithm. This algorithm grants immunity to oversupply and manipulation by a central bank.
Are you thinking of investing in Cryptocurrency?
Here are our five tips to note before investing:
1 – Do Your Research
Always do your own research and due diligence before investing. There are several forms of cryptocurrency such as Bitcoin, Ethereum, Ripple, Stellar etc. All of these have different rates of inflation, popularity and different people investing.
It is also important to educate yourself on the basics of cryptocurrency like what is a key? Do you understand the concept of a “wallet”, “fork” or an “ICO”?
When researching make sure you are aware of scammers. Be careful of who you trust when it comes to investing your money.
2 – Make A Plan – What? When? and How much?
This depends on what your goal is for investing in Crypto. You may want to be an active investor which includes buying and selling dynamically to maximise profit, or you may want to save your coins for potential growth in the future. This is where you can control the controllable.
You also have power in what type of Cryptocurrency you invest in. Whether it is Bitcoin or Ripple, it helps to look at the fluctuations before investing and choose the best time to buy.
Also think about how much you want to invest and how much equity you are prepared to lose per trade (is it 2-5%? Or more?).
3 – Never invest more than you can afford to lose
Be prepared to lose. Cryptocurrency is an extremely volatile environment with the potential for large losses. There is no such thing as a “refund” in the world of cryptocurrency so once it is gone it is gone. This is due to cryptocurrencies having a decentralised model – there is no governing body in charge of functionality. As a result, if you have any concerns or problems, you will be unable to complain to anyone.
However, with high risk comes the potential of high reward, particularly with leveraged positions.
4 – Protect your Keys
When you invest you will receive a key. This private key grants you access to your cryptocurrency, if you lose or forget your key there is no way to access it. Attempt to memorise it or share it with someone you trust / your next of kin so that you never lose access.
5 – Educate yourself on the Taxation of your Crypto
Every country has its own taxation laws regarding cryptocurrency.
Most want to know how you are using your crypto. Is it sitting there as an investment or are you actively buying and selling to generate revenue which subjects you to capital-gains tax?
Make sure you research what taxation rules apply to you before investing and keep in mind that Personal and Business taxation on Cryptocurrency differs.
Crypto-Taxation in Australia
- If you purchase crypto with the intention of selling for a profit and do so in less than a 12 month period – any profit will be taxed at your marginal rate.
- If you purchase crypto with the intention of selling for a profit and hold for greater than 12 months you will receive the CGT discount of 50%.
- If you convert from one crypto to another crypto this is the same as selling and may result in capital gains tax.
- If you make losses, they can be offset against other capital gains or carried forward against future capital gains.
- Staking/mining – this is where you earn crypto for letting the crypto be part of the network or search for new crypto – this is assessed as ordinary income and you are taxed at your marginal rate (think of this like interest from a bank account) – when you sell the crypto you are subject to capital gains tax on the difference. Assess as your income and the amount sold for.
- If you issue invoices in crypto – depending on the service you provide – GST may still be applicable and you will need to include the GST component in the relevant currency and report to the ATO. You should ensure your accounting systems have the ability to report this data for BAS’s -i.e. if you issue an invoice in bitcoin you still have GST obligations and need to report it.
- No CGT discount for companies for crypto held for > 12 months – ensure you hold the assets in the right investment structure.
The concept of “money” is ever evolving. In the old days people would trade goods as means of payment which then evolved into coins, cash, and the common day credit card which we are all familiar with. This communicates that the idea of trade and exchange is deeply rooted in our genealogy, and that Cryptocurrency may just be the next in line for our money evolution.
If you have any questions about accounting or tax implications regarding Cryptocurrency, please do not hesitate in reaching out to your ESV engagement partner for more information.