For the past decade, the explosive growth of cryptocurrency has managed to pique the interest of almost every investor. Unlike traditional currency, being a digital or virtual currency, crypto is not centrally issued. As a result, crypto stays outside the government’s authority, which is the prime reason for its popularity.
However, you would be wrong if you thought cryptocurrency was tax-free in Australia. Although there are some countries where crypto is tax-free, in Australia, it is treated as assets (such as property or shares), which simply means that you need to pay tax on it.
The concept of crypto tax is poorly understood by the majority of investors (even by the experienced ones), which is why we have prepared a guide on cryptocurrency and Australian taxes.
How does the ATO classify crypto?
It has been reported that in Australia alone, there are over a million people who own crypto. Due to such popular demand, it became necessary for the ATO (Australian Taxation Office) to publish general guidance on crypto tax in Australia. Before that, the ATO needed to classify crypto.
The ATO does not consider cryptocurrency a foreign currency or fiat currency. Instead, it is generally viewed as a CGT asset for tax purposes.
As per the official ATO website, cryptocurrency is a term used to describe a digital asset that uses encryption techniques for the generation of additional units and verification of transactions on a blockchain. Usually, crypto operates independently of the government, central bank or central authority.
The Australian government hasn’t declared crypto an official currency. It is categorised as an asset, and like other assets, when you sell the crypto for a profit, you will have to pay tax on the profit since you have made a capital gain.
Does the ATO know about my crypto?
Just because you haven’t exchanged the cryptocurrency for fiat currency yet, does not mean that the ATO is unaware of the crypto finances you have.
Since May 2019, the Australian Taxation Office started collecting data from the Australian cryptocurrency DSPs or designated service providers to make sure that the individuals were tax compliant.
The data collected may contain your personal information, including your name, address, date of birth, contact details, ABN and other information.
Along with this, the ATO can also access your cryptocurrency transactions and details of the accounts, for instance, linked bank accounts and associated wallets, the status of accounts, types of crypto, amount in crypto and fiat, and more.
For the past couple of years, the ATO has set its focus on crypto, which is why you need to be extra careful when it comes to understanding the crypto tax.
Record keeping for crypto tax
When it comes to taxes, including crypto tax, the one thing you need to pay utmost attention to is records. Keeping proper and accurate records will help you immensely in your tax return.
Here are the records the ATO may ask for:
- Receipts of purchasing, transferring or disposing of crypto assets
- A record displaying the date of the transaction
- A record stating what the transaction was for and to whom (it could only be the crypto asset address of the other party)
- Exchange records
- A record showing what the value of the crypto asset was in Australian dollars when the transactions took place
- Records of legal fees, accountant and agent
- Digital wallets keys and records
- A record displaying the cost of software used to manage your tax affairs
Crypto tax implications – Trader vs Investor
If you deal with cryptocurrency as a personal investment and a huge proportion of your earnings come from long-term gains, you would usually fall under the investor category. The gains and losses, in this case, are subject to CGT or Capital Gains Tax.
Traders, on the other hand, run a business that involves dealing with cryptocurrency to generate Ordinary income. If you wish to be classified as a trader, you will have to assess your circumstances and facts and pay attention to how the ATO will view your crypto activity.
Investor
Although you may be trading cryptocurrencies regularly, chances are you may still be considered a crypto investor and not a trader. As long as your dealings in Crytpo are as a personal investment and most of your earnings are from long-term gains, you will fall under this category.
You will have to pay tax for the capital gains or capital losses made on your crypto assets, which is otherwise known as Capital Gains Tax (CGT).
Trader
The businesses (including sole traders) that run a business involving cryptocurrency are classified as traders. To be classified as one, you should:
- Carry on the activity for commercial reasons, and that too in a commercially viable way
- Undertake activities in a business manner; for instance, prepare business plans, acquire capital assets in line with your business plan
- Prepare accounting records and also market your business name
For the people conducting trading for short-term profit or have a crypto exchange, you will be considered a trader by the ATO. There are a lot of factors that determine if an activity can actually be called a business activity.
Other factors like an individual’s professional education, the time spent on the activity, the use of automation, the scale and sophistication of the activity, and a couple more also have a say in it.
Difference between the two
To make the difference between a crypto investor and a crypto trader even simpler for everybody, here’s a simple explanation. An investor is more of a casual placer, hoping for long-term gains. A trader, on the other hand, usually has business plans, a strong record-keeping system or pattern and a high quantity of trades.
An investor can claim the 50% capital gains tax discount if the crypto was held for more than a year (12 months), whereas a trader does not get to enjoy such a capital gains tax discount. Traders are generally entitled to a small business income tax offset of up to a thousand dollars ($1,000) per year.
If an investor makes a loss or, much better, a capital loss on the crypto, they can use it to offset a capital gain. If not, it must be carried forward to the coming income years and then again used to offset capital gains only.
Along with this, the difference between the two also arises when it comes to paying the transaction fees or buying or selling fees. For crypto investors, these costs are considered when the crypto asset is sold, while for traders, such costs are deductible in the year even if the digital asset hasn’t been sold yet.
Crypto tax – The role of CGT (Capital Gains Tax)
Since the ATO classified crypto as a CGT asset, just like a share in any company, the gains and losses become subject to capital gains tax (CGT). So here’s what you need to know about it.
Capital gains
To know if you have made capital gains, you have to know the cost base. The cost base of an asset is usually the cost you had to pay to purchase it, including other costs like buying or selling fees.
Using this cost base, you can figure out if you made a profit on this CGT asset when selling, trading or gifting it. Now if you made a capital gain, you would have to pay tax on it.
12-month CGT discount
For the crypto assets that were held for more than 12 months, they may be eligible for a 50% CGT discount (they are also considered long-term gains). While for individual taxpayers, this reduces the taxable gain to half, for compliant super funds, it is 33.33%.
Capital losses
If you sell your crypto asset for less than the amount you bought it for, you incur a capital loss. Fortunately, you can use capital losses to offset capital gains.
However, as an investor, you need to be aware that if you are selling and purchasing the same asset within a short period and then realise that you made a capital loss, the ATO may deny the loss and wash sale rules may apply.
Capital gains tax rate
If you decide to trade, sell, gift or spend the crypto assets you own, the Capital Gains Tax you owe will be calculated using the same rate as your income tax. If you fulfil the conditions of eligibility for the discount, you can avail that as well.
Your total income throughout the year will decide how much tax you will have to pay. Depending upon your income, you might fall in the tax-free threshold bracket and not have to pay Australian crypto tax.
Currently, the income tax rates as per the income of an individual are given here for you to figure out how much income tax you have to pay:
Capital Gains Tax – Calculating how much tax you need to pay
Capital Gains Tax applies when you dispose of crypto. As per the ATO, the following could be one such event:
- Exchanging or trading, usually in the form of disposal of crypto for another
- Converting your crypto to fiat currency (such as Australian dollars)
- Using crypto to buy goods or services
- Gifting crypto
- Selling crypto
If any of the above-mentioned events have taken place, you will be subject to Capital Gains Tax in Australia.
What is a personal use asset?
In a few cases, you might be eligible to exempt capital gains tax if the crypto was held as a personal use asset. If you have bought cryptocurrency worth less than $10,000 to directly purchase something else with it for personal usage or consumption, you may become eligible for this.
However, you cannot use personal use asset exemption if you treat the asset as an investment. The time of disposal of the cryptocurrency helps to figure out if the asset is a personal use asset or not.
The longer you hold the asset, the lower the chances of it becoming a personal use asset, even if you end up using it to purchase an object for personal consumption in the end.
Capital Gains Tax on Investments
Crypto has become a well-recognised part of investment portfolios. If you dispose of your crypto through any of the methods mentioned before, you will be subject to Capital Gains Tax in Australia.
But when it is sitting in your investment portfolio, you do not make capital gains or capital losses, irrespective of the changes taking place in the market value. Unless you dispose of your crypto, you are not liable to pay CGT on unrealised gains.
Capital Gains Tax on exchanging one crypto for another
Digital wallets can contain numerous types of crypto, and although all of them come under a broad category, every type is considered its own CGT asset.
So when you trade crypto for another one, it is considered that one crypto is being disposed of while a new one is being acquired. Since crypto is treated in the same way as a property, the value of crypto is based on the market value of it on the day it was traded or acquired.
To calculate your crypto tax liability in the form of Capital Gains Tax, you need to note the market value of the acquired crypto at the time of the transaction.
For people who have more than one digital wallet to store crypto, transferring crypto from one wallet to another is not taxed. But, if you have to pay transfer fees in crypto, such transactions may constitute disposals and hence may be taxable.
Capital Gains Tax on Gifting Crypto
Did you just gift crypto to somebody and now are worried about crypto tax? Well, you must know that gifting is still considered a disposal, even if you haven’t received a single penny as payment for it. Thus, you will have to pay crypto tax (CGT).
But what about the person who received crypto as a gift? For the people who were on the receiving end, there’s good news. You will not have to pay the crypto tax while receiving the cryptocurrency. However, once you dispose of it, CGT applies one of the capital gains.
If you donated crypto to a deductible gift recipient, you get to claim the donated amount in Australian dollars as a deduction in your tax return.
Calculating capital gains and capital losses
To work out your capital gain or loss, you must know the value of your crypto in Australian dollars so that you can assess this information through reputable Australian exchanges or online exchanges.
If you have bought or sold cryptocurrency with Australian dollars directly, the purchase and sale price becomes quite straightforward. Also, do not forget to take the brokerage fees associated with every crypto transaction.
The sales and purchases made in alternative crypto have to be accounted for at the market value at the time when the transaction took place.
To calculate the capital gains or losses you made, you simply have to subtract the amount you purchased the crypto (CGT) asset from the amount you sold it for.
If you find it difficult to calculate these on your own, you can reach out to a registered tax agent who specialises in Australian crypto taxes to seek professional advice. You can contact Clear Tax Accountants to calculate your net capital gain and capital loss and figure out your crypto tax liability.
The people who declare crypto as their ordinary income, they may also get to enjoy the related deductions. The business expenses made using crypto throughout the financial year (plus the cost of acquiring it) can be deducted from the annual tax return, similar to fiat currency.
Getting paid in cryptocurrency
Nowadays, thanks to the increasing popularity of cryptocurrency all around the world, it is not uncommon to see many businesses, especially the ones that operate by exchanging or trading crypto, pay their employees in crypto (partially, for now).
If you receive a portion of your paycheck in the form of crypto, it will be continued as a portion of your ordinary income. Just like your normal income, it is subject to income tax.
In a couple of cases, being paid in crypto can constitute a fringe benefit. The employer will have to comply with the superannuation and PAYG rules in the same way if the employee was paid in fiat currency.
When and how can I report your Crypto Tax?
You have to file your crypto tax details at the same time as you file your other taxes. If you are lodging your tax return for the last financial year, the deadline is October 31. However, if you decide to lodge with the aid of a registered tax agent, an extension to the deadline is provided.
You can use the MyTax branch of the ATO to declare the capital gains and losses you incurred. MyTax is available through the MyGov account, and you can select the ‘capital gains or losses that are not from a managed fund’ option.
You already know how to calculate the net capital gain you made through your crypto investments. The net capital gain is the amount that adds up to your total income to determine your income tax rate. If the total taxable income remains below $18,200 or, put simply, falls under the tax-free threshold, you do not pay income tax.
How can I pay less Crypto tax?
If you are looking for a way to not pay any crypto taxes on the capital gain you made, then you are on your way to being disappointed.
However, it does not mean that there are no tax breaks available. There are a couple of instances where you might be exempt from paying the crypto tax or reducing it to some extent, as long as you genuinely qualify for these.
For example, people who fall under the tax-free threshold will be completely exempt. An individual might get an exemption if they hold crypto as a personal use asset, but this one is pretty difficult to qualify for.
Along with this, crypto investors who hold their CGT assets for more than a year before trading or selling may enjoy the 50% CGT discount.
Here are a couple of other methods that may help in improving your crypto tax obligations:
- Receiving cryptocurrency as a gift
- Purchasing Bitcoin ETFs (Exchange Traded Funds)
- Deducting the mining expenses of your crypto
- Donating crypto to a charity
- Choosing to offset gains with a capital loss
- Claiming business tax deduction (for traders)
Generally, the tax concessions available to those selling property or shares are available to crypto investments. Here are a couple of things that can also help you with your crypto tax obligations:
Keeping receipts
When it comes to crypto tax, you should keep the receipts for everything that may relate to your investment, even if you aren’t sure. A registered tax agent can help you figure out if that expense is an eligible deduction.
Claimable deductions may include interest on a loan related to purchasing the crypto, the costs associated with management or any other expense that you may have to incur with regard to purchasing, selling or holding crypto.
Try to hold the crypto for at least 12 months
If you wish to reduce the crypto tax you are liable to pay to half, consider keeping it for at least a year. In this way, you may become eligible for the 50% discount on the capital gains you make.
Timing of the sale of the crypto matters
Surprisingly, the timing you choose to sell your crypto has a huge impact on the crypto tax.
The individuals who had large capital gains in the current financial year and are considering selling their crypto should reconsider whether the sale should be before July 1 or after it.
If you are aware that you will make a loss, it is better to consider the sale of such a digital asset. Why? Because it will help you reduce your capital gains made in that year. If you will make a profit, it is better to take it into the next financial year.
We completely understand that cryptocurrency is quite a complex topic on its own, and with the involvement of tax obligations, the whole situation may have become too hard to comprehend, especially for beginners.
Hopefully, this Australian crypto tax guide helped you understand how much tax you have to pay on your crypto investments.
Since everyone has unique circumstances and a single piece of advice is not applicable to them, it is suggested to seek the advice of a tax agent who specialises in crypto taxes in Australia. Such a tax agent can help you make sure that your tax return is correct, which will ultimately help you stay out of trouble with the ATO.
FAQs
What if my business accepts cryptocurrency, but we do not mine or trade it?
The businesses that do not have any problems in receiving crypto in exchange for goods and services, payment in crypto needs to be accounted as part of the ordinary income. You can get help from a reputable Crytpo exchange to determine the market value in Australian dollars.
Do I have to pay tax if I transfer my crypto from one wallet to another?
As long as both of the wallets belong to you, you do not have to pay tax for personal transfers.
However, you will have to keep a record of the original cost of the crypto that has been transferred and should have the needed data to prove it.
You must keep in mind that moving the digital asset between the wallets cannot hide the original amount paid or will not change or hide the data about your capital gain or loss.
Do I need to declare my crypto if it is worth less than $10,000?
Yes, you will have to declare your crypto even if it is worth less than $10,000. A lot of people have this misconception that the $10,000 personal asset rule is applicable to Crytpo if it is worth less than $10,000.
However, the ATO (almost) never considers crypto to be a personal asset. Unless the crypto was bought and sold immediately to buy a personal item, the ATO would consider it a non-personal asset.
Haven’t found an answer to your question? Contact Clear Tax, a team of professional crypto accountants. We have helped a lot of crypto traders and owners find better outcomes by providing them with personalised advice. So, if you also want more profit and less tax burden from your crypto investment, reach out to Clear Tax Accountants, your local accountants specialising in cryptocurrency.
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