Changing trading stock to CGT asset
In this article, we’ll be considering a crypto trader who is converting to an investment activity.
If you’re an investor looking to change to a trader, then you’ll find this article more helpful → How to change from crypto investor to trader
The change from trading stock to an investment asset is described is described in section 70-110 of the Income Tax Assessment Act 1997:
⚖️ Tax Law
(1) If you stop holding an item as trading stock, but still own it, you are treated as if:
(a) just before it stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business) for its cost; and
(b) you had immediately bought it back for the same amount.
In short, you can imagine that your crypto trading stock was instantly sold and used to purchase back the same asset from yourself. The difference being that the asset is now a CGT asset held for investment.
As with all sale events, there are tax outcomes. The legislation explains that the cost of the crypto asset should be used for determining the tax outcomes.
- The sale of the trading stock will result in sales income equal to the original cost of the trading stock.
- The purchase of the CGT asset will result in a cost base equal to the original cost of the trading stock.
When can you reclassify trading stock to CGT
A reclassification is not a choice, it can only occur if the nature of the activity has fundamentally changed. You will need to keep evidence and records that your activity has changed to substantiate your position.
The ATO will heavily scrutinise such reclassifications, as they are aware of the desire for taxpayers to be treated as an investor during good years to take advantage of the 50% CGT discount, and to be treated as traders in bad years, to be able to offset loses against other income.
We recommend receiving written tax advice from a tax professional before proceeding with the change in tax treatment. Ask our tax team, and we’ll be happy to put you in touch with a crypto tax professional from our network.