If you’ve engaged in purchasing and disposing of cryptocurrency assets in the last year or two you may be left wondering where you stand when you file your tax return. Put simply, if you have disposed of cryptocurrency then the Australian Tax Office is interested in knowing about it. The reality of actually accurately reporting your cryptocurrency disposals can be quite difficult in practice and can be notoriously tedious. What is recommended to everyone when starting is to figure out whether they are classified as an Investor or Trader.
An investor is broadly classified as someone who is engaging in buying or selling of cryptocurrency tokens and income from these assets is derived from long-term capital gains, forks in the blockchain which create two separate coins, staking benefits derived from DeFi or Proof of Stake coins. For the vast majority of people, they will fall into this category. For everyone else they are likely to fall into the trader category. A trader is classified as someone who is conducting a business of earning an income from speculating on price movements by buying and disposing of cryptocurrency assets. Rather than assessing each transaction, traders are meant to treat profits as business income instead, however this status is scrutinised and evidence of trading activity is necessary. To get regarded as a trader the ATO needs to see actions that suggest either explicitly or implicitly that you are using trading as a means to deriving income.
How am I taxed?
As the ATO classifies digital currency as an asset, just as equity in a company or a house, every time you dispose of cryptocurrency assets you need to assess your capital gains every time you sell, trade or give away crypto. In most cases calculating your capital gain is a simple matter of calculating the difference between the prices you bought and sold at. The Australian Taxation Office has organised a thorough, though slightly technical page about calculating capital gains here.
Long-term CGT Discount
In most cases calculating your capital gain is a simple matter of calculating the difference between the prices you bought and sold at. However in Australia there is a tax benefit for anyone who holds an asset for over 12 months. For Australian residents including partnerships and trusts your capital gain tax is reduced by 50% as long as you maintain ownership of the asset for the required time.
In the case where your cryptocurrency assets are worth less when you decide to sell them, this is regarded as a capital loss. Though this may be disheartening, capital losses when recorded can be used to offset other capital gains taxes accrued in the financial year or in future financial years. There currently is no time limit to how long capital losses can be carried forward but if you make a capital gain in a subsequent year then they must be used.
There are some slight exceptions to how capital gains taxes are implemented on cryptocurrency and there are two major exceptions that can lead them to not be subject to capital gains tax.
Personal use exemptions are given on cryptocurrency transactions if you are holding less than $10,000 AUD in cryptocurrency and you use it to purchase goods and services. In these cases the ATO regards it as a personal use asset and it will not be subject to CGT.
Personal use is something which is assessed on a per transaction basis and generally does not hold if you otherwise hold the cryptocurrency in question as investment or if you’ve held the asset for an extended period, or if you acquired the cryptocurrency as part of doing business.
In short, this exemption generally just alleviates some of the burden which may be involved in quickly purchasing something with Bitcoin or Ethereum at a pub or restaurant with recently acquired crypto.
For some greater clarity you can find examples on the ATO website.
Donations are also regarded as exceptions if you donate cryptocurrency to a registered charity it is also not considered a taxable event and since it is for charity you can then claim the amount (calculated by the fair price of the cryptocurrency asset at the time of donation) as a deduction on your tax return like any other charitable donation.
Lost or Stolen Cryptocurrency is one final exception in cases where you have permanently lost access to coins either through misplacement of private keys, fraud or theft, you may be able to record this also as a capital loss as explained above. Be aware however as you will be expected to provide solid evidence that you owned the coins, ideally probably through transaction history going back to a KYC (‘Know Your Customer’) verified exchange account, and in the case of theft, evidence of the crime and even police reports. As this is something that could be abused, extra scrutiny should be expected.
What's my tax rate?
For individual investors your tax rate is simply determined by your individual tax rate which is determined by what your total assessable income is. If you are a trader then your tax rate is calculated still on the same individual tax rate, only your capital gains or losses won't be assessed but rather your overall trading gains or losses.
For businesses (i.e. partnerships and companies limited by shares) then your tax rate will be the same as it is for all business related income after deductions at 27.5% as it currently stands.
Currently stable coins such as USDT, USDC and BUSD are regarded in the same way as any other crypto asset is regarded. Trading Bitcoin for USDT or USDT for Bitcoin are both examples of a capital gains event which you will need to record or be able to record.
Recommended record keeping
What every investor should do on all asset purchases is have an accurate and comprehensive record of purchases. As cryptocurrency can be a wild west and prices can fluctuate violently it is vitally important for your own defensibility to keep the best records you possible can including information such as:
- The transaction date and time
- The value of the of each asset being traded in AUD at the time of the transaction
- The transaction purpose
- Any additional information including crypto addresses to and from
It is also highly recommended that you keep evidence of cryptocurrency purchases and transfers, records from the exchange itself, as well as any wallet information you might be able to back up including seed words and wallet.dat or similar files. Many Australian exchanges now offer users the ability to simply download complete records of transactions which will give you a document which is useful for calculating your taxes, however if you move funds to exchanges based overseas or third party wallets it is highly recommended you keep any information you can from these transaction movements as well.
Advice for people unsure about how to approach tax
Give yourself the strongest legs to stand on when it comes to tax time and any potential future audits or investigations. Keeping records which accurately reflect your transaction and trading history, ideally with evidence on the blockchain itself, can give you the best possible means to defend yourself. If you are excited by the growth of the industry and ecosystem then it is wise to keep holding onto your crypto assets for more than 12 months so you can take advantage of the 50% long term CGT discount. Disclose everything you can. It is an erroneous and mistaken belief to think that Bitcoin, Ethereum and other blockchains are anonymous. Their privacy model is strictly one of pseudonomy, meaning that identity is separate from transactions. It is wise especially when dealing in large amounts to prove when you had control of the asset and when you didn’t. Due to reporting requirements from Australian exchanges and companies such as Chainalysis which help governments trace proceeds of crime, forums such as Reddit and Australian centric crypto groups on Facebook are sending enthusiasts some alarming letters about neglectful accounting.