Cryptocurrency is decentralized digital money that’s based on blockchain technology. The most famous are Bitcoin (Innovated in 2008 first traded in 2009) and Ethereum
A cryptocurrency is a medium of exchange that is digital, encrypted and decentralized.
It was first designed to be a system to trade goods (buy and sell) however speculative trading in Cryptocurrencies has become a significant driver in their trading.
The best illustration of their working is the examination of how they came to be.
Firstly, they were designed to be a currency of exchange.
Secondly, the were designed to avoid the traditional existing banking systems of the world.
Thirdly, they were designed to operate in the digital world.
Finally, to gain traction and in acknowledgment of the proven secure traditional banking world they had to prove they were secure. This goal was achieved using a Blockchain.
A Blockchain is simply a ledger where every record has a number, and the records are updated simultaneously as transactions are entered with each blockchain member having access to the updated data. Transactions are entered into the system in ‘blocks’ but only after they are verified. The verification is undertaken via complex algorithm mathematics with the verifier receiving bonus cryptocurrency.
The verification process is undertaken by mining (proof of work) or Staking (Proof of Stake) which guarantees the security of the blockchain. Whilst verification earns bonus cryptocurrency, fraudulent mining or staking results in losses to the provider. The security within this Blockchain system is extremely high.
The verification of blocks and individual transactions entering the system can take from 10 minutes to 2 hours and requires a large computing and power resources from the verifier (thus the bonus).
In addition to earning cryptocurrency from the verification process, you can simply buy them on an exchange.
DAILY USE
Cryptocurrencies are intangible. Ownership is like a key that allows you to move a unit of measure from one person to the next.
Presently, cryptocurrencies are not generally accepted by the majority of retailers, although their use is growing. As with cash and credit cards you will need a Crypto wallet.
ACQUIRING CRYPTO’S
The first point of note about Crypto’s is their extreme volatility and by extension their extreme speculative risk. To illustrate here is a list of Bitcoin price variations during 2021.
- Jan 21 $39k
- April 21 $79k (double)
- June 21 $40k (Back to nearly half)
- Nov 21 $97k (Highest point in 2021)
- Dec 21 (Down 33% in 5 weeks)
Due to these large unit costs, it is possible to purchase a part of one unit in crypto’s.
HOW TO BUY CRYPTO’S
The first step is to choose a platform between traditional brokers and specialist Crypto exchanges.
The most appropriate platform depends on your needs in the following areas:
- the individual crypto currency you wish to buy,
- the fees applicable from the provider,
- the security features
- storage and withdrawal options
- any educational resources
Once you have considered the need and benefits of the service provider you choose, you simply need to provide the funds to undertake a transaction.
There are many Crypto exchange dealers with the following offering a variety of services:
Bifinex
Robinhood
Binance
STORAGE
Once acquired you store your crypto’s in a hot or cold wallet which is a matter of internal online or external offline software. This is critical because the Crypto’s are simply numbers (like keys) and if misplaced cannot be recovered.
CRYPTO FRAUD
Like Cybersecurity, fraud in the crypto world is on the rise. Common sense and checking of all untested processes and following the steps below is the best defence. Once you have acquired a crypto, the internal blockchain security is extremely strong however it is the processes entering and leaving where funds can go astray.
YOUR OWN (BEST) PROTECTION.
Your Exchange:
Research the exchange you use as there are many to choose from. See above
Storage of your Crypto:
-Checkout with your exchange what they offer for your wallet choices, the fees and how they work.
Protect your personal details:
-Don’t share them with anyone until you have verified their bonafides.
Update your anti-virus software to the very best.
TAXATION IMPLICATIONS
Being a new asset and intangible, the taxation of gains made on cryptocurrency’s have tested traditional taxation theory.
The fact that it is called a currency does not qualify it as one from the ATO perspective. The technical argument being that it is not recognised as a “currency” by any sovereign government, which has now been proven incorrect with recognition by the El Salvador now in place.
However, until there is a new ruling, the realised gains made will be taxed as a capital or revenue gain depending on the circumstances. Obviously, there is an attraction for the capital gains route due to the gains being taxed after a 50% discount.
This stance is also supported by case law.
That said, if there is no income can be derived from the holding of the crypto’s then it would appear reasonable to argue that the intention in buying was a profit-making undertaking meaning the gains should be treated as a revenue gain.
If trading is limited to one transaction with a cost of less than $10,000 then it may be arguable that the assets was for “personal use” and exempt from capital gains. This is tenuous with the form of personal use being educational and of general interest in a new fad. Given crypto’s are traded in small doses with many transactions this argument would be defeated if the normal trading was the score.
As with share trading there is also consideration that a large scale or transactions (Volume and or Value) could suggest the trading was a business which would then involve recognition of inventory holdings. As with share trading, this would be rare but a necessary consideration in certain circumstances which you would think would be obvious.
Crypto mining, staking and trading seems to be most successful with numerous smaller transactions. Accounting for movements is a critical area which can involve many transactions with not all transactions being simply in and out. Beside Exchange reporting, specialist software is available to assist report your activity accurately. We recommend initial subscription to Koinly as a starting point for multiple transaction reporting which costs around $100 per annum.
Crypto currency trading is a targeted area for ATO auditing and follow up.
It is important to note that they have very large resources and data sharing facilities such that non-disclosure is not (and never should be) an option.
If you want to know more about Crypto’s give us a call.
