At times is can be quite obvious if you are carrying on a business such as when you are mining and selling bitcoin for profit, creating
NFTs as an artist for resale or even running a crypto exchange. The size, scale, profit motive and capital deployed would typically put you
into that category.
However, there may be situations where it might not be as clear. For example, if you are trading crypto, digital assets or
non-fungible token (NFTs). This is an old argument even before the inception of Bitcoin and Crypto of:
“Are you a crypto investor or trader?”
The distinction is super important because the tax strategy that maybe deployed to achieve the most optimal tax outcome vastly depends
on the activity that is carried on.
For example, when structuring for the activity, you might be better off using a corporatised vehicle like a private limited company to
trade given the 30% (or 25% for base rate entities) corporate tax rate.
This is contrasted to a HODLER; where using a crypto investment trust provides access to the 50% CGT discount not otherwise accessible
Tax Differences between a HODLER & Trader
So, what are the differences?
At a high level, if you hold crypto or digital assets as an HODLER, the gain or loss from disposal is held on capital
account and subject to the capital gains tax (CGT) regime. Accordingly:
- Your crypto or digital assets are subject to CGT when you sell them
- If you have held your crypto for more than 12 months, then you are eligible for a 50% discount
- Costs are taken into account at the time you sell (the costs are capitalised to the cost base)
- If you have a capital loss, you can use it to offset any other capital gains; but not ordinary income
- There are special rules with regard to parcel matching within your discretion (e.g., FIFO, LIFO, HIFO)
If you hold crypto or digital assets in trading, then the gain or loss is treated on income account and taxed under the
normal income rules under Section 6-5 (e.g., salary and wage, interest, rent). Accordingly:
- Your crypto or digital assets are treated like trading stock (as mentioned above)
Your gains are treated as business income (ordinary income) and tax is based on your marginal rate for individuals (or corporate base
if you are a company)
- Your expenses and costs are treated as deductible expenses in the year incurred against trading income
- The closing stock balance is required to be adjusted to capture your true profit/loss on trades
Depending on your circumstances, the losses may be subject to quarantine under the non-commercial loss rules contained in Division 35
of the Tax Act.
Am I crypto trading bro? It depends!!
Now that we have distinguished between the two in terms of tax treatment, we consider what is means to be carrying on a business of crypto
or digital assets trading. There are unfortunately no legislated tests in this regard, but rather case precedence.
Overtime the following factors have been taken into account:
The nature and purpose of the activities:
- Whether there was an intention to make a quite dollar or profit?
- Were the trades short terms time horizon transactions?
- Whether a business plan was conducted?
- Is there an appropriate trading strategy in place?
- Do you have a set guide on decisions to buy or sell crypto assets?
Repetition, volume, and regularity of your activities:
- What is the frequency of transactions?
- What are the number of similar transactions?
- Are their regular, planned purchases and sales with a routine?
Whether your activities are organised in a business-like manner:
- How much time did you dedicate to this activity?
- Did you conduct a study of trends,
- Do you subscribe to professional subscriptions and resources,
- Did you obtain advice from leading experts,
- What sort of equipment do you use?
- Do you have a business premises or dedicated home office for trading?
- What are you industry qualifications or experience?
The amount of capital invested:
- What is the size and amount of capital deployed?
- Are profits/income/capital being reinvested?
- The larger the amount of capital invested is indicative of intent to carrying on a business
Example 1: Digital Assets Trader
Sam has a full-time job as an accountant but after discovering Bitcoin and Crypto from ARK invest, he decides to start trading crypto as a
Sam sets up an office with a dedicated trading computer and multiple monitors in one of his rooms in his home. He has $100,000 of his own
funds to invest and borrows through interest-free credit cards of another $20,000.
He analyses the market developments daily using specialised crypto rating services and has a good understanding of trend lines and
technical analysis through courses and materials he has read over time.
Sam’s objective is to identify assets that will increase in value quickly and take advantage of the massive volatility of the crypto
market to turn a quick profit. Sam makes 200 buying transactions and 150 selling transactions. The average transaction side is $1,000.
Sam uses a mix of crypto trading on exchanges and on-chain activity through his MetaMask account. The average time held for crypto
assets is around 4 weeks.
Overall, Sam would be carrying on a business of crypto trading.
Example 2: Crypto investor
Stacey has a full-time job as an accountant but after being orange pilled by Sam, he decides to gain exposure to the crypto space.
Stacey invests a total $75,000 into crypto assets, $40,000 in Bitcoin and $35,000 in Ethereum. Her investment thesis is that as adoption
and network effects happen with these two protocols there will be an appreciation on the value over time. His investment timeframe is 5-8
A big proponent of purchasing in Ethereum is also to stake the asset to generate income yields in a passive manner. He uses Lido (a
liquid staking derivate) to stake and earn rewards with his ETH.
Overall, Stacey is simply a crypto investor.
Whilst this does serve as a guide, it ultimately it does come down to the facts of your personal situation. Unfortunately, you cannot
pick and choose whether you are a trader or HODLER. The best approach in our experience is to be proactive and deploy strategies in a
Need to navigate this regulatory tax complexity? No worries, Consensus Layer is your team of specialist crypto accountants that
helping you navigate this revolutionary digital and financial frontier together.
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