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For a trader, cryptocurrencies are considered trading stock.
For an investor, cryptocurrencies are an asset subject to CGT upon sale.
How to determine if you are a "trader" or an investor for tax purposes
There is no fixed list of rules to determine who is and who is not a trader. To accurately determine if you are a trader, you must consider your intention in undertaking the activity and the objective facts of the activity. Even if you have determined that you are a trader, the ATO may not agree with your interpretation.
In our experience, the ATO takes into account a set of over 20 indicators to determine whether a person is a trader or an investor for tax purposes.
The three main indicators to determine if you are a crypto trader are:
1. Repetition, volume, and regularity
This indicator considers the frequency of transactions, the volume of purchases and sales, the regularity of transactions, and the scale of trading activity. Factors indicating trading activity include:
- Placing trades regularly and consistently.
- Managing trading positions regularly.
- Investing significant capital or obtaining a business loan for cryptocurrency trading activity.
- Trading with comparatively large amounts.
- Dedicating the equivalent of a workweek to activities related to crypto trading.
At the more extreme end of a trader, someone would be operating an automated trading bot and taking advantage of small price movements in the market by placing thousands of trades per day.
Unlike a trader, an investor is someone who manages their portfolio a few times a year and conducts a small number of trades.
2. Sophistication of cryptocurrency operations
This indicator determines whether trading activity is conducted as a genuine business operation. Factors indicating more sophisticated trading activity include when the trader has:
- Relevant qualifications and knowledge of the industry.
- An ABN (Australian Business Number).
Do I have to have an ABN to be a crypto trader?
No, it is not necessary to have an ABN to be a cryptocurrency trader. However, having an ABN is a factor considered when determining if you are a trader for tax purposes.
- Registered a business name.
- A physical business location.
- Charting software and equipment.
- A complete trading system used full-time for trading.
- Training and development of financial and data skills.
- A business plan that is periodically reviewed.
Unlike a trader, an investor is usually employed full-time in an unrelated field and conducts trades with little research.
3. Trader documentation
Trader documentation typically includes:
- Business plan.
- Trading strategy.
- Trading journal.
- Financial statements.
- Detailed records.
- Tax invoices for expenses.
These documents are used to justify the business activities being conducted.
Although a crypto investor may have an investment strategy, they do not have a business plan to generate profits. An investor buys crypto for long-term growth and/or income returns.
Crypto traders have a documented trading strategy, as well as a documented business plan. They prepare annual financial statements and periodic reports to assess their performance.