After the peak of the cryptocurrency market in 2017, many individuals were actively involved in trading cryptocurrency. The market was increasing at a rapid pace and there was significant hype surrounding cryptocurrency. Individuals would be trading multiple tokens, using multiple exchanges, investing significant time, effort and capital, spend free time researching trading methods and reading white papers; all characteristics of a trading activity (in business).
After 31 March 2018, we have noticed an overall reduction in trading activity. The hype from the market has softened and individuals appear to be savvier about the tokens they invest in. Trading volume has decreased, the number of tokens has been consolidated and, in some situations, the emotional roller coaster has become a well-rounded strategy.
Changing from trading cryptocurrency (in business) to holding cryptocurrency (property on revenue account) may have tax implications to consider.
This article will briefly revisit those differences, and outline cryptocurrency tax implications if a taxpayer changes from a trader to a holder. Finally, it will conclude with practical recommendations.
Differences between trading and holding cryptocurrency
Traders are in business, and holders hold property on revenue account. They are taxed under different parts of the Income Tax Act.
There is no one size fits all approach that distinguishes traders from holders. It depends on the nature of the activity and intention of the taxpayer. The key factors to consider are:
- Statements of the taxpayer about their intentions
- Nature of the activity
- The period over which the person engages in that activity
- The scale of operations and the volume of transactions
- The commitment of time, money and effort
- The pattern of activity
- The financial results
Read more about the differences, including the different cryptocurrency tax treatments between traders and holders and our recommendations here.
Ceasing trading activity – transfer of closing stock at market value
A cryptocurrency traders tokens are classified as trading stock for taxation purposes. Once the trading activity ceases their tokens need to be transferred from ‘trading stock’ and transferred to ‘property held on revenue account’.
A transfer from trading to holding will result in a deemed sale at market value, on the date of transfer. The sale price will become the new cost value (purchase price) for the property held on revenue account.
John ceases his cryptocurrency trading activity. He holds 100 ABC tokens with a value of $10,000. The market value is $15,000. John will record a disposal of his 100 ABC tokens at the market value which will result in a taxable gain of $5,000.
The new cost value of the property held on revenue account is $15,000. A future disposal of the ABC tokens will result in a taxable gain/loss between the future sale value, and the new cost value of $15,000.
The concept of transferring trading stock at market value is applied to many other ordinary businesses. Furthermore, under an anti-avoidance provision from IRD, a sale of trading stock for no consideration or for less than market value is treated for tax purposes as having been sold at market value on the date if disposal.
We recommend taxpayers:
a clear strategy and long-term plan. For example:
- What do you want to achieve?
- How will you achieve?
- What’s my next step?
- Regularly review and adjust this strategy as need
- Understand that if a change in strategy may result in tax implications
- Understand the tax treatment of the chosen strategy
We are Chartered Accountants who prepare financial statements and income tax returns that involve cryptocurrency. We also provide personalised tax advice to your individual circumstances.
This is only our interpretation and has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.