Tax on Bitcoin and Cryptocurrency

I’d like to clarify some thoughts around the tax on Bitcoin and cryptocurrency profits.

Background of Bitcoin and Cryptocurrency

Bitcoin has sometimes been referred to as the ‘currency of the underworld’. But whatever your view, it is likely that the currencies of the future will be cryptocurrencies.

This topic is fairly controversial, especially in the last sort of four or five months when Bitcoin shot through the roof (December 2017). This has lead onto more focus in the media, and an increase of conversations that we’ve had with our clients about the subject.

Bitcoin has been around since January 2009, and is a type of virtual currency. You might have heard the word cryptocurrency, which Bitcoin is one example of. But there’s lots and lots of other cryptocurrencies as well now that have come out since Bitcoin. There’s literally hundreds of them, if not thousands, and more and more people are working on developing their own cryptocurrency.

Here’s a list of the top ones by market capital: coinmarketcap.com

There’s people on both sides of the fence: some saying, “You’re going to lose all your money.” But on the other hand, there’s people making millions of dollars.

In the end, there’s people out there making money and there’s people out there losing money. But that’s not the point of what we’re here to talk about – go and rant on Facebook about that.

We’re here to talk about the tax effects, and what you need to consider from a tax perspective.

Tax on Bitcoin and Cryptocurrencies

I might pre-empt this by mentioning I actually bought and sold some cryptocurrency. But in no way am I a trader and I’m making millions of dollars from this. I actually put some money into it, so I could see how the crypto-world works, and how you actually buy and sell these currencies, and transact in them.

Now the first thing to consider is the ATO haven’t been very public on their opinion and recommendations in great detail on cryptocurrency. The ATO have released some materials on it though. There’s forums that the ATO hosts where people have asked lots and lots of questions, and they haven’t really got great or any answers.

But they have set some guidelines to cryptocurrency that you do need to consider. If you ignore them, and you’re caught out, then there will be massive penalties and fines, because that could be seen as tax evasion, or tax avoidance. People end up in jail for that sort of thing. We’re not here to ignore the fact that you’re making profits in Bitcoin or cryptocurrency, and so we need to address it.

Bitcoin and cryptocurrency as a Capital Gains Tax Asset

Firstly, the ATO see cryptocurrency as a CGT asset, or Capital Gains Tax asset. That generally means that you’re buying an asset to sell it later for a gain. You’re not necessarily making a business of it let’s say.

It’s kind of similar the ATO seeing gold bars, an investment property or even shares held on the Australian Stock Exchange as capital gains tax assets.

If you buy, let’s say $50,000 worth of Commonwealth Bank shares, and you sell them 10 years later for $100,000, you make a $50,000 gain on them. That’s called a capital gain. The ATO wants their cut, called capital gains tax.

You may also know about the capital gains tax discount, where if you are in an asset for more than 12 months, then you receive a 50% discount on the tax payable on that gain.

Let’s go back to the CBA shares, where if you buy them for $50,000, 10 years later you sell them for $100,000, then instead of paying tax on $50,000, you’ll pay tax on a $25,000 discounted gain.

Now what the ATO has said about cryptocurrency, is yes, they might consider your investment as a capital gain, and be able to give you that 50% discount, if you bought it over a year ago before you sold it.

But you need to be very careful, because they’ve also said that people who actively trade in Bitcoin or cryptocurrencies will be taxed as if that income was business profits.

In that case, you won’t actually get a 50% discount, even if you own that currency for more than 12 months.

Now from the people I’ve spoken to, there’s kind of two types of crypto investors:

1. Tax for Passive Bitcoin and Cryptocurrency Investors

There’s ones who were lucky enough to buy, let’s say Bitcoin for a couple of cents, or a couple of dollars back in the very early days. Now their portfolios are worth tens of, or hundreds of thousands of dollars, or even millions of dollars.

But they would’ve whacked a few dollars on it years and years ago. They woke up all of a sudden, and bam they’ve got massive portfolio worth of Bitcoin.

Now had you not traded that stuff day-to-day, week to week, or even month to month, the ATO might actually consider you’re eligible for that 50% capital gains tax discount.

That’s the first type of investor, which is very passive, and you’re not too involved. You’re not logging in each day, and checking the price, and making regular decisions based on that.

But let’s say you are that person who, you might have got into it early. You might have even gotten into cryptocurrency recently, but you’re trading it quite actively. Read on…

2. Tax for Active Bitcoin and Cryptocurrency Traders

Trading it ‘actively’ could even be making a few trades every week or month.

Now what I’ve seen with most of the traders who go about this to make profit (and it might be literally a part-time, or even a full-time job they’re doing trading cryptocurrency) is that in my opinion, and even the ATO’s opinion, it is actually considered business income.

So it wouldn’t be seen as capital gains for those investors. They wouldn’t receive that 50% discount, even if it’s held more than 12 months.

Now another point to mention is, I don’t believe not having access to the discount matters so much for these sort of traders, because they’re usually making trades and buying and selling on shorter than 12 month turnarounds anyway.

They might buy a coin for let’s say 1,000 bucks. Then a couple weeks, a couple of months later, they’ll sell all or some, to capture their profit.

Now even if that was capital gains, you would’ve paid tax on the full gain (without a discount).

But if we’re realising it as business profits, you’re still going to pay tax on the full amount anyway.

Using business structures to trade Bitcoin and Cryptocurrencies

Now that brings into consideration the ability to use business structures. Our biggest strategy to control how much tax you pay.

The first thing to consider is that the tax rate of each structure.

Sole Trader: If you buy and sell bitcoin or cryptocurrencies in your own name, you can be taxed at the highest marginal tax rate of 47% tax.
Companies: Or if you run your business through a company, you can pay tax at either 27.5% or 30% tax, depending on your turnover.
Trusts: if you structure it through a trust, you basically distribute profit from that trust to family members, or other entities (like other companies) in your family group.

Unfortunately, I think most people started out with cryptocurrency as a sole trader – a little bit of a thing they do on the side. It may have actually turned into a highly profitable business. Just watch you’re not going to forever give 47% of what you make to the tax man.

A big thing to consider is what business structure you trade through. Now if you’re thinking this, and you’ve already made a decent amount of money already through cryptocurrency, we can’t go and retrospectively implement these things. But I’d definitely consider changing your structure moving forward. Especially if you’re going to continue making those profits moving forward.

Now the difficulty we get is it’s actually quite hard to get a designated company or trust account with a lot of these cryptocurrency exchanges. (Where you buy the coins.)

One thing you need to do is consider, “Well, I might want to structure through a company or a trust, but how to actually do that, when I can only signup for these things in my own name?”

This is why I intentionally went through the process of buying coins, and signing up for stuff – and this is one of the brick walls I hit and have since overcome.

There may be ways to achieve by signing up in your own name, buy running the profits through a company or trust – where you act on behalf of the company or trust.

As an example, if you are successful in running your trading through a company, then on your profits you’ll be paying tax at a flat rate of 27.5%, instead of up to 47% tax that you’ll pay if you do it in your own name.

I’d encourage you to reach out to us so we can have a chat about your situation, and see whether one of these options would be available to you.

Record keeping of Bitcoin and Cryptocurrency trading

The other really important thing to keep in mind when you’re trading the cryptocurrency, or buying and selling, is make sure that you have records. Now, done a few trades, I’ve found it’s really, really difficult to keep track of it, given the prices change so much. You might be converting AUD -> BTC, then BTC -> some other random coin -> and so on.

There’s also no real central exchange or platform that you buy and sell coins from either. If you’re trading more than just Bitcoins, like Bitcoin and Ethereum, or whatever, some of the other big ones, there might not be just one exchange or place that you trade them.

But you might have signed up to three, four, five, or six exchanges and be buying and selling them from many different places. (Or even peer to peer trades with some of the smaller coins.)

The critical thing is to make sure you’ve got a way of systematically keeping a track of your profits. Now, I’d hope you’re doing this in any case to make sure you are making money, but on the other hand, the tax man will want to see how you come up with your calculations of profit.

Now, there are some websites that you can use to keep track of this for you. There’s been mixed feedback on them, but CoinTracking.info has a fairly decent way of reporting your trades and keeping track of your values.

If you’re making tens of trades a day, you probably want a way that automatically keeps track of your trades for you. I don’t know any at the moment, so if you know of any let me know in the comments below.

There’s a bit of background on tax on Bitcoin and cryptocurrency. I hope that’s been helpful, and please let me know if you have any other questions.

B1G1 Study Tour to Kenya

Property Development in Kenya

We visited Aberdare Ranges Primary school on Day 2, then we drove up the road to the village which is where most of the children live.

We learned that much of the poverty and displacement was due to political violence in 2007. Due to an election, if you didn’t vote for the right person your house could be burned down and you could even be killed! Crazy stuff – but real. So it caused a lot of families to head out of the towns, and into the rural areas away from the violence.

But what was great to hear is after the political violence broke out, the Kenyan government gave each family around $100 USD to rebuild their lives.

Now there was an extremely entrepreneurial chief who suggested 1,000 families combine their $100 USD, and buy a big block of land.

From memory, this land was around 5 or 6 acres, and they got a town planner in to create roads, and blocks for each of the families to live on.

Each block has enough room for a very small house, but it was this coming together that created a community – that now 10 years on is thriving.

The kids are getting a great education only 20 minutes walk up the road, and this will mean the kids getting jobs, and bringing money back to this community.

The community even has its own medical centre, seeing 80 patients a day. All of this possible with that chief having his entrepreneurial thought process developing the land.

A hand up, rather than a hand out

One of the more well known projects in B1G1 is the ‘Goat Project‘, which we visited on Day 6.

We think it’s about the meal we’re giving; but it’s so much more.

This project is the hardest one for me to talk about, type about, or even think about.

3 Steps to Transition to Cloud Accounting

How do you move to Cloud Accounting?

The transition from a desktop based accounting system to a cloud accounting package is an art.

1. Choose your cloud accounting package

Firstly, you will want to make sure you’ve chosen the right package for your business. The best way to do this is to discuss your needs with an adviser.

Sidenote: there are many accounting firms and advisers who align themselves with only one brand (we were one of them!). Remember that it needs to be the best fit for your business, rather than the one with the most hype.

2. Prepare for the transition

Having helped over 100 businesses implement cloud solutions, the transition can be a bumpy ride.

I heard a saying recently from a friend who served in the military, “Time spent in reconnaissance is seldom wasted”. This saying remains true when transitioning to the cloud.

You need to consider:

The date that you will transition to the cloud (called the ‘conversion date’)
Training for your accounting team
Other applications that will synchronise with your accounting package
Support required for the first few months from your accountant
Additional time you will need to get used to the system

We find that the first few weeks of implementing cloud accounting software can be draining, and we offer 24 hour turnaround support through our help center. We strongly encourage you to stick with it though, as after that on-boarding period, things are a breeze!

3. Take the leap

Once you’ve done all of your preparation and ideally worked in with your adviser, you’re ready to take the leap.

Ideally, you will have had the training before the conversion date, and your accountant will have set up the accounting package ready for you to start working in.

So step 3 is relatively easy – log in, and start crunching away! Oh, and don’t forget to lean on an adviser that has experience in your accounting package.

Question 2: Holidays (7:28)

HARVEE: I love it. Grossly simplified, but that’s actually the power in the process. It’s very cool, let’s go onto the next one then, which is one of my favorite topics. What was the Holidays button there Ben?

BEN: Yeah, yeah, I got reminded of it this morning actually. We want to work out, throughout the year, planing around the seasonalities in your business, when are you going to take your holidays? Something I have been guilty of is actually not looking after myself and what that turns into is low health. Health is the first thing to go which means then that has the effect on your mind and business performance as a result. Holidays is putting yourself as a priority. A time where you switch off and focus on you and your family. What Harvee and I did, was blank out some dates in our calendar and where we want to go on those dates, to treat ourselves and to yeah, just have some time off the business.

HARVEE: Very good. Where are you heading in March for?

BEN: Yeah, for Stevie and I’s first anniversary, we’re heading to Italy. We booked the flights just before Christmas and I’m super excited for that.

HARVEE: Yeah, I’m happy for you too. It’s a priority, we’ve got to make it happen. I’m just coming down off of very good high of a month off in December, last year and I traveled around my own beautiful country, New Zealand, in the South Island and it was just magic. Again, as Ben described, it’s your own way to sharpen the axe, as they say in terms of becoming a greater person and more fulfilled and complete. Also, a mentor of mine, who I used to work alongside, he had a very strong mantra where he always believed that it was really important to take four annual holidays, no questions asked, of at least two weeks per trip. He had his unique cycle of locations that he went to. In addition to all the really logical justifications, not that you might need many for holidays, he said as a business owner, what was really important is again, an opportunity to get out of the way for the rest of the team and to recognize where the gaps in both his team and recognize the gaps in his systems within the business.

When he came back, he saw where the problems were and were able to fix that. Whereas if you’re always there and always, for lack of a better word, in the way, there’s not opportunity for people to step up and make decisions in your absence. If you were looking for any more reasons to prioritize holidays in your life, then there’s some more additional ones for your business. Very cool.

Question 1: Profit (4:45)

With that in mind,weI might start with that first one, Profit. What we’re talking about there is how much you’d like to take out of the business in the next 12 months. Whether that’s 100 grand, 200 grand, 300 grand, but putting a target or a number down. Yeah, something to aim for.

BEN: Yeah, it sure is. It’s a strategy where, for every dollar that comes in the business automatically you put a few percent straight away into a separate profit account. You don’t actually put it in there, pay your expenses and then whatever’s left is your profit. If 10 grand comes in, you put automatically $1,000 into your profit account. Just like many people do with GST, automatically over to the side. Profit’s out first and then whatever’s left is to pay your expenses with.

HARVEE: Yeah. It’s quite reminiscent also of the Richest Man in Babylon, that was the classic personal wealth process in terms of paying yourself first. Why couldn’t that same idea apply to a business. Yet, I don’t think many people take the time to question, well what would a beautiful lifestyle look like? What would that actually cost? Therefore, how would we use our business in such a way to specifically fund that very clearly defined lifestyle? This is what lifestyle design is all about. Ben, just on that, once you do pluck whatever your magic number is, what form and effect might that have been to what the sales team might do today or what team we might have working in the business day to day?

BEN: Yeah, yeah. Once you know your profit, and this doesn’t have to be a crazy process. Harvee and I did this on one eight four page with the iPhone as a calculator. We got the profit that we wanted to each take out of the business, all the expenses to run the business, and that gave us an overall revenue target. Now if you’ve got an idea of your average client value, let’s say that’s 10 grand, and let’s just say 300 grand was your revenue target, then you only need 30 clients to deliver your profit target and pay all the bills. Then, with that 30 clients in mind, your marketing and sales team can say, “All right, well how many do we need a month.” That’s their KPIs to achieve the business’ and your lifestyle and profit goals.

Question 3 and 4: Ins and Ons (10:00)

Let’s go into Ins and Ons please Ben.

BEN: Yes. What those two dots, the In and On mean is time spent in the business versus time spent on the business. This concept is shared in a book written by Michael Gerber called the E-Myth where usually people spend too much time in the business that they never get time to build it and look at those systems and fill the holes where they need to.

HARVEE: That’s right. If I could just add there too Ben, the rationale behind that is, and if you’ve read Michael Gerber’s stuff you’ll understand, is that most people go into business because let’s say they’re a great smoothie maker or they’re a great accountant, or architect or marketer. They’ve got a technical skill and they think, you know what? I could run a business and they don’t realize all the other pieces that are involved in doing that. What ties you all, gives you a tendency to want to work in the business is because you can actually do those technical pieces. I understand the struggle, it is in actually taking your hands off. Have you found that Ben in letting go of some of the tax and technical stuff in the last six months?

BEN: Yeah, that’s right. You’re always learning what you need to get out of the way from. Yeah, business is great. You need to prioritize the on time and it’s just such a default, like a human condition default. Where we resort back to our technical or where we came from. We must take time, really disciplined to work on the business.

HARVEE: Understood. I read a book, Four Hour Work Week by Tim Ferris, and his recommendation was to straightaways go Mondays and Wednesdays are off and out of the business. Now, Ben and I won’t know exactly how to pull that off straight away, but what we’ve been doing consistently for the last, let’s say four months would you say Ben? Is our unique thing of what we call WOW, or Work on Wednesday. That’s the day that we’re out of the office and we’re specifically working on the business and on projects based around creating systems or creating marketing content or strategizing new product lines or ways to improve our existing product lines and letting the team members keep running ahead with working in the business side of things.

For the context of this, let’s get a predefined goal of what are the days you want to be working in the business and what are the days you want to be working on. For the days you are in the business, what are the times that you want to aim for. This is helping us be able to construct what an ideal week might look like for you. Ben, let’s get onto the final point in this really important considerations and that is Retreats.

Question 5: Retreats (12:36)

BEN: Yes, yes, and you might look at this as an excuse to go somewhere lovely, but it’s exactly what we’re talking about at the start, where Stevie and I and Harvee went away for a couple of days with the sole focus of relaxing and also working on the business. Yeah, taking ourselves away from our normal working and home environments. What we did is, how many of these retreats do we want each year? We’ve also booked in some time to take them. I reckon they’re so powerful and Harvee’s going to share one of the two big things shortly, that we made a decision on for this year. That wouldn’t have happened undoubtedly, if we weren’t in Northern New South Wales, surrounded by some lush green fields of grass. Yeah.

HARVEE: That’s so funny. For everyone who knows what’s common in Northern New South Wales, it’s not what we were talking about. Very cool. Just on those retreats, what is the tax implications of that? We went away, spent four days, we spent however much money what was invested in that side of things. We were working on the business specifically, but also having a bit of fun. What are the tax implications, is there another benefit or justification in taking these retreats from a tax perspective?

BEN: Yes, being careful. Part of those retreats is what you can claim. The part is, there might be a blog article on very shortly.

HARVEE: Yeah, awesome, cool, thanks very much for that. If in doubt, seek advice from your taxation professional and make those decisions wisely. Any other things you wanted to mention Ben before we move on at the end of our webinar today?

BEN: Yeah, I think that’s, we’re all good to keep moving.

Conclusion (14:37)

HARVEE: Yeah, beautiful. There are the five considerations that I want you guys to give the gift to yourself of having at least, it doesn’t have to be perfect, and a wonderful five page plan. It can look as simple as some notes in your iPhone, or a little piece of paper where we’re scribbling these key numbers down. What is the magic number around profit? What would an ideal year look like in the terms of the number of holidays? Even get excited about the locations and the duration of them. Think about what an ideal week might look like? Is it Monday, Tuesday, Thursday, Friday in the office and are those in times between seven and four, or is it even earlier so you can get home to pick up the kids?

Is Wednesdays your work on the business day where you WOW like we do? Or do you have another day or another time that that’s done? Also, what are some excuses, or what are some pre-planned triggers that if no questions asked, if you don’t do the WOWs or the working on your business during the weeks, that at least every year you’re taking some time out, either with your business partner or yourself, or with the team as well, to actually have a plan about where we’re heading in that next period. With the keyword, or the key part of that word being treats. It is a treat and I don’t think we should shy away from that in business. We work our butts off and deliver a great value for ourselves and for our community and you absolutely deserve to be treated.

That’s the end of our webinar. I wanted to give you guys a heads up on what’s coming up this month. I also want to ask for some help please. One of the things that Ben and I worked on in our work on the business was a one day workshop that we’re going to be rolling out this year for small business owners. That’s because we received a lot of feedback in the last 12 months about how business owners are in business, and they’re doing what they do, but they don’t really have firm control on the numbers. They aren’t actually numbers people and they want to get an understanding about what are the key numbers that we can set up, whether it be in calculations and lifestyle design, whether it be calculations and profit, or whether it be setting up key KPIs for the team members so that we’ve got this numbers based machine that’s running and pushing and helping us create a beautiful business.

We’ve put together this business workshop and we’re running our first beta workshop in about two weeks time. Before I release this invitation to the world, if you like, in terms of coming on to that very first workshop, I really would love some feedback. If you guys are willing to give me an email address that I could flick you through the agenda. Please don’t share it with anybody yet, until I share it with the world. I’m just looking for a bit of perspective. Ben and I were in that zone in burn, but we want some second opinions on what else absolutely must be included in this workshop. If you’re willing to give me some feedback, either by email or a quick phone call after you’ve read through the agenda, I’d really appreciate that a lot.

The way you can help us out, if you’re willing to do so is email hello@inspireca.com and I’ll get that and say, “Yeah, I’m willing to help and give you my two cents worth on the Cash Rich Business workshop.” I’ll send you through the agenda and if you can give me some feedback on what we absolutely must put in there, then I’d really appreciate that from whatever perspective you’re coming from. Whether it be a small business owner, or whether it be an accounting firm who may be in today’s session as well. The other heads up that I want to give you, especially if you’re a local here in Bris Vegas, if you haven’t heard, we have an Inspire meetup. They became very famous in 2015, we are absolutely bringing them back in a big way in 2016.

Our first Inspired meetup is next Thursday afternoon at 4:30 pm. It’s an Australia Day themed meetup in which we’re celebrating great Australian businesses. We’ve got a great special guest speaker who is the founder of a very powerful movement here in Brisbane called Entrepreneurs of Brisbane and you’re going to love the message he’s got to share in celebrating all great things Australian. We’re also going to have lamingtons and meat pies and I think Ben’s dad is going to bring some sausage and have a barbie down there. This is a great opportunity for small business owners to come and connect and meet each other and network and share ideas about what’s working for them. We’ve got some really powerful meetups coming up this year. In fact, just a little bit of snippet.

Jessica, who’s our event coordinator is on the phone with Warner James today, speaking about how we might be able to get some pretty powerful names and identities and profiled business owners to be able to share their unique stories. Definitely stay close if you want to be inspired about creating a great business this year. Thanks very much everybody for attending our first webinar. Happy New Year and welcome back. Again, give yourself that gift of taking the time, go out and grab a coffee now if you have to. Scribble down with your pen those five things.

What profit do I want this year, what holidays do I want to commit myself to taking this year and next, how much time do I want to spend working in and on the business, and what about specific excuses like retreats or conferences, perhaps, could I attend that will give me the accountability to working on my business. Not just continually during the week, but to break up my year in one, two, or three segments. Give yourself that gift and I look forward to boosting collectively our profits in 2016. Thanks guys, we’ll see you next month or next Thursday at our meetup.