The world of cryptocurrency is strange and complicated.
In this four-part series, Information age examines the history of crypto, how you can get it, what you can do with it, and Australian innovators looking to capitalize on this emerging technology.
Throughout this series (parts I and II), we learned about the blockchain technology behind cryptocurrencies, how to buy and store coins, and better understand the history of Bitcoin and the problems it seeks. to solve.
If you’ve taken the plunge and bought cryptocurrency, you might be wondering: what now?
Unless you live or plan to relocate in El Salvador, you will be hard pressed to find many places that accept bitcoin or other cryptocurrencies as a form of payment.
This won’t necessarily always be the case, as with each passing month it seems more and more payment companies are dipping their toes into cryptocurrency.
Square – a preferred cashless service used by smaller sellers – has signaled its entry into the space by investing in a large bitcoin holding company and is looking to develop its own line of non-custodial products. hardware wallets.
PayPal entered the market last year when it began rolling out native cryptocurrency features that allow users to buy, sell, and hold Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
In March, the company took another step forward by allowing its American customers to Order with Crypto which means that customers can choose to automatically convert their cryptocurrency holdings into fiat currency upon finalizing transactions.
U.S. cryptocurrency exchange Coinbase has taken a similar path with its own Visa debit card that automatically converts cryptocurrency to fiat currency upon purchase.
It is currently only available to a small number of users in the United States, but provides an example of how the use of cryptocurrency can expand into the real world.
There is one major downside to this method of converting crypto to fiat: the tax.
While this looks like using a debit card or Apple Pay to complete a normal transaction, as the transaction involves that conversion, it can be treated as a gain event in many jurisdictions, including Australia.
We will come back to taxation shortly.
Spend your coins
There are hundreds, if not thousands, of different cryptocurrencies that you can buy and sell, many of which claim to have utility beyond savage price speculation.
One of the uses of cryptocurrency that has exploded over the past two years is decentralized finance (DeFi).
These are platforms, usually built on smart contract blockchains like Ethereum, that give users access to financial services that you might normally find in a traditional bank, such as margin loans and interest on bank deposits. cryptocurrency.
Decentralized Exchanges (DEX) are a type of DeFi service that serves both as a means of continuing to keep cryptocurrency away from central power structures as well as a means of making your crypto work for you.
Platforms like Uniswap and Pancake swap make it easy for people to trade different cryptocurrencies or tokens, including some you might not find on large centralized cryptocurrency exchanges like Binance.
Some DEXs are automated market makers that depend on user generated liquidity to operate.
Cryptocurrency users essentially lend their coins to a DEX’s cash pool, allowing other users to trade a wide variety of crypto-asset pairs.
Take the Safety moon token, for example, which was part of a massive spike in speculative activity earlier this year.
Like many small cryptocurrency projects, it has not been hosted on large exchanges and instead relies on people trading coins on DEXs like Pancakeswap.
Basically, DEXs need high levels of liquidity to account for large volumes of transactions, so there is an incentive for people to deposit their coins on these exchanges by earning interest in the form of cryptocurrency.
Interest rates can be high – especially compared to the record savings rates offered by banks – but staking, as with many aspects of the cryptocurrency world, comes with risk in the form of impermanent loss, which may leave the liquidity provider less of a certain cryptocurrency due to the market maker reacting to price changes in the real world.
Non-fungible tokens (NFTs) have become a major trend in the art world this year, providing digital artists with the ability to sell their wares in a way that gives buyers a sense of scarcity and authenticity that makes art a store of value.
Unlike regular cryptocurrencies, NFTs are a form of crypto asset designed in such a way that each is unique and not interchangeable.
Since NFT ownership records are kept on a blockchain, it is easier for art dealers to verify the authenticity of a work.
And artists can see greater benefits from blockchain smart contracts by printing royalty features on NFTs, meaning they can receive cryptocurrency whenever a work is resold.
A recent explosion in NFT activity has seen the opening of hundreds of different NFT markets and stores, giving shoppers and artists a chance to cash in on the latest craze.
Once you’ve gone to an NFT marketplace and bought, say, an animated gif for almost a million dollars, then what?
Users can show off their NFT art purchases in virtual spaces like Cryptovoxels and Decentraland that attempt to create 3D metaverse-like social experiences.
These platforms expand the idea of NFTs by selling space and other assets in their virtual worlds as NFTs, thus strengthening the ownership of digital assets on blockchain technology.
Fun and games
Where developers create apps, video games are quick to follow and Dapps are no exception.
the Global Asset Exchange (WAX) blockchain is a great place to find different Dapps, early video games, and NFT marketplaces.
It is a hub for pop culture products in the form of NFT trading cards that can be purchased directly from a vendor and then sold in secondary markets.
Alien worlds is a first cryptocurrency video game – played in the browser – in which you play as an interplanetary miner in search of resources in the form of Trilium cryptocurrency (TLM) and mining or combat equipment.
Players choose a mining location on a planet – the locations are NFTs owned by other players who receive a commission from your TLM mining – then attempt to unearth as many TLMs as their equipment allows.
Better equipment means greater rewards.
Because every game asset in Alien Worlds is an NFT, they can be bought and sold in secondary markets like the Atomichub for WAX cryptocurrency.
Since TLM and WAX can be bought and sold on cryptocurrency exchanges, players are incentivized to earn real money, making Alien Worlds and many other blockchain video games an example of a ‘play for’ game. to win “.
The tax of everything
Now that we know some of the options for spending and playing with cryptocurrencies, it’s important to understand a bit about how cryptocurrency ownership fits into the Australian tax landscape.
In short: it’s complicated.
The Australian Taxation Office (ATO) has a set of information sheets dedicated to how he treats cryptocurrencies for tax purposes, but unfortunately it turns out that almost anything you do with crypto is classified as a capital gain event and may need to be considered when filing your income tax return.
Let’s say you bought an amount of Dogecoin five years ago just for fun and this year you suddenly found the Doge in your wallet worth over a thousand times what you paid for it.
It is intuitive that you should report, for tax purposes, any gains you might have from cashing out your Dogecoin in the same way you would for capital gains from traditional investments like the sale of shares or property.
Unfortunately, cryptocurrency is slightly more complicated.
According to the ATO, most uses of cryptocurrency count as capital gains events, not just when you cash your fiat coin.
“Because you receive goods instead of cash in exchange for your cryptocurrency, the market value of the cryptocurrency you receive must be recorded in Australian dollars,” the ATO said.
For example, let’s say you wanted to convert some of your Dogecoin earnings to Ethereum to buy on an NFT of a meme you really like that was recently auctioned off.
Trading Doge for Ethereum would have been a capital gain event and the value of your new purchase of Ethereum, in Australian dollars, should be reflected on your tax return.
It gets more complicated.
You might have heard of another coin, like Safemoon when its value was increasing, and you wanted to get involved.
Unfortunately, you couldn’t directly exchange your Doge for Safemoon and instead needed Binance Coin (BNB) to be able to use another DeFi service like PancakeSwap.
In this case, you traded Dogecoin for BNB and then traded BNB for Safemoon.
Each step in this chain is a capital gain event and must be converted to Australian dollars to account for the capital gain or loss incurred – and the same happens when reselling your position in a cryptocurrency. , even if you haven’t. resold it in Australian dollars.
Likewise, if you earn wagering rewards for joining a cash pool – or as part of a proof-of-stake network – the cryptocurrency rewards and interest you earn can be classified as income, determined. by the market value of the cryptocurrency at the time you received it.
Keep in mind that there are third party services like Koinly that connect to your wallet and exchange APIs to simplify the process.