In investment, diversification is vital. Placing all your bets on one asset class not only exposes you to the risk of a catastrophic loss in the event of a market crash but also denies you the opportunity to profit from the growth in other asset classes. Cryptocurrency is the newest major asset class in the financial landscape and is rapidly gaining traction. 

Perhaps as a sign of its growing use, crypto has caught the eye of the Australian Taxation Office (ATO). We take a look at cryptocurrency and tax in Australia, the tax implications of crypto trading and investing, and outline how to calculate your tax obligations.

Understanding Cryptocurrency and Taxation

For tax purposes, the ATO classifies cryptocurrency as a capital gains tax (CGT) asset, personal use asset or as a trading stock. There are differences in how the tax is calculated in each scenario.

As a CGT Asset

You are considered a crypto investor if you trade casually on your own behalf, mine crypto as a hobby and/or you expect to generate a return over the long term (12 months or more). Most people will buy and hold cryptocurrency as an investment meaning they will fall in this category. This article focuses on calculating tax on crypto as an investor.

The ATO classifies crypto investment as an asset that falls under CGT. You make a capital gain when the proceeds from crypto disposal exceed its cost base. Similarly, a capital loss occurs when the cost base exceeds the crypto disposal.

It is important to mention that CGT in this respect is simply a title. So the tax rate applied to your capital gains will be the same tax rate as your income tax. So in case your income falls below AU$18,200 in the financial year, you do not pay tax since this is within the tax-free band.

Crypto investors are eligible for a 50% CGT discount for crypto held for 12 months or more. The 12-month period is reset each time you sell, convert or trade your asset. 

As a Trading Stock

You are deemed a crypto trader if you run a crypto exchange, trade or mine crypto as a business, buy and sell frequently (for short term return, typically under 12 months), and/or your trading actions are all strategic.

Overall, traders are typically characterised by business plans, detailed record keeping and a high number of transactions. Traders are not eligible for the CGT discount. However, they may qualify for the small business income tax offset that’s up to AU$1,000 annually.

As a Personal Use Asset

You may be completely exempt from crypto tax if you hold it as a personal use asset. However, it is rare for one to qualify for this. Crypto is categorised as a personal use asset if you purchase up to AU$10,000 to directly purchase something else for consumption or personal use. The longer you hold a crypto asset, the less likely it will be considered a personal use asset.

Types of Taxable Crypto Transactions

Central to understanding crypto transaction taxation for investors is knowledge of what constitutes a CGT event. A CGT event is deemed to have occurred when

The type of event your transaction falls under could determine the time the event happens and how the capital gain (or loss) is calculated.

Calculating Capital Gains and Losses

First, determine the gross capital gains.

Gross Capital Gains = Sale Price of the Crypto (or its fair market value if you no longer own it) – Sum of the Crypto’s Cost Base in AU$ (Plus Associated Transaction Fees)

The cost base is the price difference from when you acquired the asset versus when you sold it.

So, for example, you bought 1 Bitcoin for AU$24,000. This is the cost base. Then eight months later, you use the Bitcoin to buy 80 ETH (Ethereum) when the ETH’s value is AU$600. The effective value of the 1 Bitcoin at this point will be AU$48,000. The capital gain for the trade will therefore be AU$48,000 – AU$24,000 = AU$24,000.

Next, calculate the net capital gain. Two factors come into play here:

Therefore,

Net Capital Gains = Total Capital Gains – Any Capital Losses – Entitlement to Any CGT Discount

You can also use our crypto tax calculator to help estimate your capital gains for the financial year.

Record-Keeping Requirements

Record-keeping is an essential precursor to CGT calculation. To determine whether you made a capital gain or capital loss for every CGT event, maintain records of your crypto assets and the corresponding transactions. 

For example, remember that 50% discount on CGT if you hold a crypto asset for more than 12 months? Tidy record keeping of each crypto helps you know beforehand when you have the chance to harness this advantage. It is also crucial in avoiding potential tax penalties.

The record should be as detailed as possible but should at the minimum contain the date, value in AU$, purpose, fees, counterparty, wallet/exchange used and, where applicable, income from each transaction. Each crypto you own is a separate asset and records for each should be separated accordingly.

Using Tools and Resources

If you have crypto transactions spread across multiple exchanges and wallets, you will probably be best served by crypto tax calculation software. Not all such tools for crypto tax comply with ATO guidelines so it’s important to choose one that does. 

Portfolio tracking tools could come in handy as well. They automatically sync data from multiple wallets and exchanges. Many double up as crypto tax calculation software. While these tools can usually generate tax reports and identify taxable events, they are not fool-proof and do not always include all relevant CGT events.

Further, recognising that crypto is a relatively young industry that isn’t always well understood, the ATO has gone to considerable lengths to provide free online tools and tips you can use to quickly calculate your taxes.

Dealing with Complex Transactions

Next, we take a look at three types of uncommon transactions – forks, staking and airdrops. I will mention here that in case you are not sure of your crypto tax obligations, are finding it difficult to navigate the ATO’s guidelines or if you generally deal with unusually complex crypto transactions, consider contracting a tax professional that specialises in crypto. 

Forks

Forking happens when a blockchain transitions from one protocol to another. If a fork leads to the creation of two separate coins whereby the holder of the preceding coin is given a new coin, the ATO considers the new coins as having a cost base of AU$0. If you sell the new coins, your capital gain will effectively be the amount you sold them for.

Staking and Airdrops

Staking occurs when holders of a cryptocurrency are rewarded for their role in a Proof-of-Stake consensus mechanism of transaction validation. An airdrop happens when holders of a crypto token or coin are distributed additional coins to their wallets for free.

Staking rewards and airdrops are classified as ordinary income and have to be reported on the tax return. In either case, the value of the asset is based on the crypto’s fair market value at the time it was received. The ATO taxes the income at the marginal tax rate. This income has to be reported within the year it is received irrespective of if you held or sold the crypto. 

The exception to this rule are what the ATO calls initial allocation airdrops i.e. airdrops distributed before any trading of the token. Initial allocation airdrops are not taxed as income but may be taxed later as capital gain when they are sold. In which case, the cost base is AU$0.

Conclusion

Cryptocurrency may have thrived primarily due to its decentralised nature free of government control. That has not however made it immune to taxation. Understanding how to do your tax with crypto so you can fulfil your crypto tax obligations is essential to avoiding the penalties and other repercussions of noncompliance. Maintain a meticulous record of your crypto assets and transactions to have certainty that nothing falls off the cracks.