Crypto & Australian Tax 101: The Basics You Need to Know!
With crypto currencies back in the mainstream news, everyone seems to be an expert, so what do you need to know before getting involved in this latest wave of hype? If you are after an explanation of what Bitcoin is, how the ‘blockchain’ works, or why any of this is worth anything, then you’ve come to the wrong place… but if you are looking for a basic understanding of the tax repercussions from buying, selling or HODLing (Hold On for Dear Life) cryptocurrencies then strap yourself in!
Do I need to pay tax on my crypto gains?
Long story short, if you have engaged in any sort of cryptocurrency transaction during the year, it is likely that you will need to let the ATO know in one form or another. Having said that, cryptocurrencies can be very complicated, and the end tax calculations will be dependant on a variety of factors.
The first thing you need to figure out is whether the ATO considers you to be an investor, a trader or if you hold it for personal use only (if you have made it this far through, first off congratulations on reading a tax-related article, and secondly, we will be getting to the personal use tax exemption later… so bear with me). This will determine the end tax treatment of any gains or losses.
Am I an investor?
If you are buying and selling cryptos as an investment, then you will be considered an investor. You will predominantly make your income from long term gains (as well as other events like forks, staking, airdrops etc.). Most people dabbling in cryptocurrencies would fall into this category.
Capital Gains Tax (CGT)
If you are an investor, then your cyptos are considered an asset (effectively the same as if you were investing in shares or an investment property) and any gains will be subject to CGT. As an example, if you purchase 1 Bitcoin for $20,000 and then sell it three months later for $40,000, you have made a ‘capital gain’ of $20,000 and will need to pay tax on this amount.
Under the same principals, you can also claim a capital loss where you make a loss on any cryptocurrencies sold. These capital losses don’t necessarily reduce your overall taxable income but
can be used to reduce any future capital gains and can be carried forward indefinitely.
12 Month CGT discount
For assets that are held longer then 12 months, you can reduce your capital gains by 50%, and cryptocurrencies are no different. Using the same example above, if you buy 1 Bitcoin for $20,000 and sell it for $40,000, you have made a $20,000 gain. However, if you held the Bitcoin for over 12 months, you would be able to reduce this gain by a further 50%, meaning you would only need to pay tax on $10,000.
Selling crypto for crypto
Contrary to popular belief, just because you have not pulled your gains out of your wallet into Australian Dollars does not mean you are exempt from CGT. If you are selling one crypto for another (e.g. if you sell 1 Bitcoin for 29 Ethereum), then your capital gain (or loss) is based on the market value at the time you make the trade.
As you are likely starting to realise, this can be a very challenging and complicated exercise to calculate for your end of year tax return. While most exchanges provide gain or loss reports as well as detailed transaction history, it can be very difficult and time-consuming to summarise this to the ATO’s satisfaction. Reach out to your Poole Group accountant and we will be able to assist, ensuring that you remain compliant, without wasting hours of your own time.
How much extra tax do I need to pay?
If your wallet is in your personal name, you will pay tax on any capital gains at your personal marginal tax rate. This will vary, depending on your other taxable income, but if your only other income was a wage of $80,000, your marginal tax rate is 32.5% (2021 financial year).
Am I a trader?
Traders also buy and sell cryptocurrencies with the intention of making a profit, but they do it in a business-like manner with a focus on short-term profit. If you run a trading business, rather than getting taxed on every transaction you just report the total business profit or loss (effectively the same as any other business).
While there is no definitive rule, some factors taken into consideration include:
- More short-term profit focused
- Volume & regularity of trading
- An overarching trading strategy
- A significant amount of capital used to trade
- Running the whole operation like a business, e.g.:
- Business registrations (ABN, GST etc.)
- Strategy documentation
- Record keeping
- Office space
- Budgeting & business planning
All the above factors are taken into consideration to determine if, on balance, you are running a trading business.
What are the benefits of being a trader?
A trader gets access to several tax benefits, including:
Claim your losses: Where an investor’s capital losses won’t necessarily reduce your taxable income, a trader’s business losses can reduce your ordinary taxable income (as long as you meet the
Tax incentives: Small businesses are eligible for tax offsets of up to $1,000 as well as reduced tax rates for some small businesses (2021 financial year).
Expenses: Small businesses are also able to claim deductible business expenses (inc. hardware, software, subscriptions, office space etc.). Importantly, the business may also eligible for some small business depreciation concessions on business assets. Currently, some of these concessions include temporary full expensing of depreciating assets, instant asset write-off & accelerated depreciation measures (2021 financial year).
What are the downsides of being a trader?
Being classified as a trader can also come with some downsides, including:
No CGT discount: Because each trade isn’t categorised as a capital gain (or loss), trading businesses lose access to the 50% CGT discount.
Time & effort: As with any business, there are extra admin burdens, such as record-keeping, research notes, strategy records etc. If the business turnover exceeds $75,000 p/annum, you will also have to register for GST, which will require quarterly lodgements, probably an accounting software (like Xero) and potentially higher bookkeeping & accounting costs.
What if I just use my crypto for personal reasons?
Ok, let’s be honest…. this is the real reason you are reading this article… how do I use my crypto and not pay any tax at all? Well, it’s not easy, but it is possible! Here we go:
If you have less than $10,000 in cryptocurrencies and use it for personal goods or services (effectively using it like a normal currency), then there are no tax consequences. It’s that simple. However, there are still a few things to be aware of:
- Personal use is considered on every transaction – just because it applies once does not mean it will apply every time thereafter.
- If you are holding crypto as an investment, to make profit or to carry on a business, it is not a personal use asset.
- The longer crypto is held for, the less likely it is to be a personal use asset.
- If you have to convert your crypto to AUD before using it on personal goods or services, then it would not be considered personal use (you have to make the purchase directly with your cryptocurrency).
- The ATO have broad powers to look through any schemes designed to avoid paying tax, so these exemptions are only available where you are genuinely using crypto to purchase everyday goods or services for your personal use.
If you haven’t gathered already, this can be a very complicated area of tax and even many tax practitioners are struggling with the rules around this new technology. The ATO’s data matching is getting more sophisticated every year, so care must be taken to ensure you don’t fall foul of these complex rules.
Make sure you reach out to a Poole Group cryptocurrency expert and we will be able to guide you through these tax rules, help you figure out what category you fit in to as well as assisting with any other tax or financial assistance you may need.
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Disclaimer: This article is based on cryptocurrencies rules for an individual (as opposed to a trust, company, partnership or SMSF). There are a myriad of taxation considerations when it comes to cryptocurrencies and the above scenarios are in no way comprehensive. This article is for educational purposes and is general advice only and should not be used to make investment or taxation decisions. Before making any investment or taxation decisions, you should speak to your financial advisor or accountant who will be able to tailor advice to your personal situation. Reach out to one of our in-house specialists today! All information is correct at the time of writing but may vary from year to year, and as legislation and interpretations change.
Dale has been an accountant for over 10 years, helping guide families and businesses over any hurdles thrown at them. He aims to simplify the jargon and put your mind at ease that your financial future is in safe hands. In particular, Dale's specialty areas include; entity structuring; risk & asset protection; business advice; and property developments.