With more and more people beginning to adopt digital currency like Bitcoin and Ether, you might be wondering how to go about managing your crypto wallet.
How do they work exactly? What are the tax implications? In this article, we’ll answer those questions and more.
How crypto wallets work
Unlike traditional wallets, crypto wallets don’t actually store any currency. This is one of the biggest misconceptions about how crypto wallets work. The truth is, no currency is actually stored anywhere in any physical form. What does exist are the records of the transactions which are stored on the blockchain.
So with that out of the way, what actually is the purpose of a crypto wallet? Essentially this is where you store your public and private keys with various blockchains. Your crypto wallet allows you to monitor your balance, send currency, and receive it too.
When a person sends you some bitcoin for example, what they are doing is transferring ownership of the cryptocurrency to your wallet’s address.
If you want to spend those coins and unlock your funds, the private key stored in your wallet must match the public address the currency is assigned to.
What about tax?
A big part of managing your crypto wallet is ensuring that you’ve accounted for tax implications when you make crypto transactions.
When considering the tax implications of transacting, trading or holding crypto currency, you need to be on top of the rules and regulations laid out by the ATO.
In order to work out whether or not you need to pay tax on certain transactions, you first need to determine whether or not you’re an investor or a trader.
Investor Versus Trader: What’s the difference?
You’re an investor if you hold cryptocurrency for the purpose of capital appreciation and as a store of value. Most people buying, selling and holding cryptocurrency fall into this category.
If this sounds like you, then you will have to pay capital gains tax on the sale or disposal of any cryptocurrency. You may also be able to claim or carry forward a capital loss where relevant, depending on the outcome of the sale.
Traders, on the other hand, are people who set up a business with the intention to make money from the purchase and sale of cryptocurrency. Traders are usually subject to income tax on their cryptocurrency.
Still confused? Talk to the team at Infinity 22
Nobody likes being in hot water with the ATO, so if you’ve started wetting your toes in the cryptocurrency world, it’s wise to hire a professional who can tell you exactly what your tax obligations are when buying or selling crypto.
Managing your crypto wallet doesn’t need to be difficult, but when it comes to doing your taxes at the end of the financial year, it pays to have a professional team like the experts here at Infinity 22, look over your financials!
If you’re interested in learning more about our services, give our team a call on 0452 184 421
or send us an email at info@infinity22.co
