Cryptocurrency Tax Explained
Is crypto taxable in Australia?
Yes, crypto is taxable. Failure to declare crypto in your tax return could result in penalties for tax evasion. The ATO can track crypto transactions from as far back as 2014. The ATO has a data matching program to crack down those who don’t pay their crypto taxes. It is very important that you understand the tax implications when investing in crypto. We are here to help with your crypto taxes.
How is crypto taxed?
In most cases people buy crypto for their own portfolio, as an investment asset. Crypto is subject to capital gains tax. In some cases people buy crypto for trading, as a business. Crypto is viewed as trading stock and subject to income tax. In rare cases people buy and keep crypto for purchasing personal use items only, in that case, the crypto is viewed as a personal use asset and can be exempt for tax purposes. The criteria to determine how your crypto is classified for tax purposes is as follows.
Crypto is viewed as an asset and subject to capital gains tax when
You are a crypto investor if you invest in crypto for future gains. You buy and sell crypto as an investment stock and normally hold crypto over an extended period of time with the goal of building up your wealth.
Capital gains tax arises when you dispose of your crypto investment and make a profit.
The following events are considered as disposal of your crypto investment and therefore trigger a capital gains tax event:
• The sale of crypto assets for either Australian currency or foreign currency;
• Giving crypto assets to another party as a gift;
• Exchanging an item of cryptocurrency for another type of cryptocurrency; and
• Exchanging crypto assets for goods or services.
Capital gain or loss is the difference between the cost value you pay to acquire the crypto and the value of the crypto on disposal. If you make a gain, you declare it in your tax return as income, if you make a loss, you can deduct the loss from any capital gains, or carry forward the loss to future years if no capital gain is available for the offset. Capital loss can only be offset against capital gains, it cannot be offset against any other income.
If you hold the crypto investment for 12 months or more before the disposal, you are entitled to 50% capital gains discount.
Capital gains are included in your taxable income and taxed at your marginal rate after the above discount if relevant.
Crypto is viewed as trading stock and subject to income tax when
You maybe regarded as a crypto trader if you buy and sell crypto as a business, ie., you are active in crypto trading to generate an income and is operating in an ordinary course of business. Factors to be considered include the scale, the volume, regularity and systematic planning of the trading. Any profits you make from the trading are assessable income and any losses are tax deductible.
Crypto is viewed as personal asset and exempt from tax when
Crypto could be treated as a personal use asset if it is used mainly to purchase items for personal use and consumption.
When crypto is treated as personal use asset, capital gains made from disposal are normally disregarded if the crypto was acquired for less than $10,000; and capital losses are disregarded.
Crypto wash sales – what is it and is it worth the risk?
Crypto wash sales involve the disposal of crypto and acquisition of the same crypto in a short period of time, to deliberately create an artificial loss for a tax benefit by offsetting the capital loss against capital gain in the same year. This does not include the kind of short time frame acquisitions and disposals made by active traders. The ATO uses sophisticated data analytics to find wash sales and should not be triggered by normal trade activity.
“Don’t hang yourself out to dry by engaging in a wash sale. We want you to count your losses, not have them removed by the ATO”. The ATO states those who engage in wash sales are at risk of facing tough compliance action and potentially additional tax and penalties.
Theft and loss of crypto
If your private key or crypto is lost, you may realise a capital loss. However, you are required to provide a lot of evidence to prove your claim. Maintaining good records is vital.
Tax on Staking and airdrops
Staking - if you receive new tokens as a reward for staking existing crypto, the value of the new tokens will be included as your assessable income.
Airdrop - if you receive new tokens as a way of increasing adoption, the value of the new tokens will be assessable income.
Generally the value of new tokens received under staking and airdrops will be assessable income on receipt, the value will also form the cost base of the tokens on disposal. Note that under the new ATO guidelines issued recently, airdrops of new tokens for free will not be regarded as ordinary income, but the airdrops of established cryptos – those already have a trading history, are assessable income. So free tokens with no established value would only be taxed on disposal with a cost basis of zero.
Receiving and giving crypto as gifts
If you receive crypto as a gift, capital gains tax will arise when you dispose of the crypto. The cost base of the crypto is the market value at the time it was gifted.
If you give crypto to someone as a genuine gift, then this would trigger a CGT event. As you receive no consideration for the disposal of the crypto, you are treated as having received market value proceeds for capital gains tax purposes.
Gifting/donating to a Deductible Gift Recipient (i.e. a registered charity) is tax deductible.
The future of cryptocurrency regulation
The cryptocurrency space is evolving at a rapid pace and regulation could change how some or even all cryptocurrencies are treated for tax purposes. We will endeavor to update this post when regulation changes or otherwise renders information here obsolete.