Cryptocurrency has taken the world by storm and, over the past decade, there have been countless headlines speaking about many facets of this disruptive and rapidly evolving technology.
It would be a safe bet to say that the average Australian citizen has now heard of crypto and either has experience with it themselves or know at least one person who has.
Everyone appears to know a fact or two about this topic but a less known fact about cryptocurrencies is that they’re actually taxable.
Yes, they are taxable and the Australian Taxation Office (ATO) is investing more resources & energy into getting the public to understand & comply with their rules.
This guide was created to serve as an overview of what cryptocurrency traders and investors need to know about crypto tax in Australia to make sure they stay in the ATO’s good books.
What Is Cryptocurrency?
Cryptocurrency (or “crypto”) is a form of currency that can operate independently of a central political and economic authority.
There are many examples such as Bitcoin, Bitcoin Cash, Etherium, Dogecoin etc and all cryptocurrencies are generally created using highly secure cryptographic methods.
This technology enables individuals to pay for items and services without needing a 3rd party like a bank or using fiat currency.
It is also now common for cryptocurrency to be used & viewed as an investment vehicle, with significant returns being made by both cryptocurrency traders and investors over the past decade.
Cryptocurrency Has Tax Implications In Australia
The Australian Taxation Office (ATO) has made its position on the tax treatment of cryptocurrency very clear. In summary, crypto transactions generally come with some form of tax obligation & it’s the duty of the individual participating in these transactions to ensure they’re meeting their tax obligation.
The specific tax responsibilities vary depending on each circumstance, but the ATO at a minimum requires accurate records to be maintained for all cryptocurrency trades & transactions.
If crypto activity took place with a foreign cryptocurrency exchange or through international brokerage services, another country might also have crypto tax obligations beyond what the Australian Government requires.
The details of specific tax obligations change from person to person & situation to situation, however, there are several critical pieces of information all every Australian cryptocurrency investor needs to know.
Crypto is viewed as an asset, not a currency, by the ATO.
Crypto remains relatively new, and therefore it doesn’t currently have a status as legal tender in Australia. The ATO treats crypto as an “asset” for tax purposes at this stage.
What Is An Asset?
Any resource owned with economic value that could provide future returns could be considered an asset. Examples of common assets from a taxation perspective are cash, property, paintings, and now crypto coins.
Capital Gains Tax (CGT) Liabilities
In most cases, a crypto coin is viewed as an asset and when this asset is sold its viewed as a taxable event with capital gain tax rules generally applying.
What determines if the CGT rule applies to cryptocurrency users is if the ATO assigns a trader or investor classification to the cryptocurrency activities.
Investor Or Trader?
Most cryptocurrency users are profiled as investors, not traders, by the ATO, and there is a big difference between the crypto activity of the two.
A trader is essentially an individual or business that purchases and sells assets to generate a regular income. The ATO uses a few defining factors in assessing if someone is or is not a trader.
These factors include:
- The type of activity (long term hold vs trying to make a profit)
- The repetition, volume & regularity of trades.
- The situation surrounding the trading activities (is the trader conducting themselves in a business-like manner with a business plan, premises, dedicated accounts etc.)
- The amount of capital/cash invested (measured in Australian dollars)
If an individual or organisation is operating professionally, making frequent trades with significant capital to generate an income – they will likely be classified as traders.
In most cases, with a trader classification – capital gains tax rules will not apply.
If most of the gains are earned through long-term investment, this operation will be classified as an investor, and Capital Gains Tax Rules will apply.
Most entry-level investors would prefer to see themselves as traders because they take multiple positions in the market each day or week.
However, in the eyes of the ATO, even if someone is making frequent trades unless it is of a large enough size & they’re endeavouring to generate an income – their classification is as an investor, not a trader.
This investor classification is positive, even desirable, in most situations, despite what the aspiring trader might think. This is because investors have a more simplified tax process, and (depending on the investors level of income) gains could be taxed at a more favourable rate.
In summary, traders use “investing” to generate a primary source of income while investors use it to create long term wealth. The ATO assigns a classification according to these guidelines, generally speaking, of course.
Unsure If Capital Gains Rules Apply?
As a rule of thumb, someone who owns cryptocurrency and is not driving a full-time income from this investing is classified as an investor, and capital gains rules apply.
Capital Gains Tax Obligations
Four disposals could trigger a crypto capital gain or loss:
- Selling crypto for any fiat currency, like Australian Dollars (AUD)
- Swapping crypto for crypto, like Bitcoin to Ether
- Spending crypto to obtain goods or services unless the personal use asset rule applies
- Giving crypto as a gift.
Capital gains are realised on crypto when a coin is disposed of at a higher value than it was acquired for.
Capital losses are realised on crypto when a coin is disposed of at a lower value than it was acquired for.
It’s the responsibility of the entity making the transaction to calculate the capital gain or loss for each crypto disposal.
It’s important to note that CGT is not a separate tax in most instances.
The net capital gain/loss generated from disposing of a crypto asset is considered when determining the assessable income for the crypto investor for the year in which the disposal took place.
Cryptocurrency As A “Personal Use Asset”
It’s essential to understand if cryptocurrency is viewed as a Personal Use Asset when determining crypto capital gains tax obligations in Australia.
The following information has been pulled directly from the ATO’s website and explains this in detail:
“Personal Use Assets are CGT assets which are kept primarily for personal use or enjoyment. Some capital gains or losses from disposing of cryptocurrency that is classified as a “personal use asset” may be disregarded.
Cryptocurrency is not a personal use asset if it is kept or used mainly:
- as an investment
- in a profit-making scheme
- in the course of carrying on a business.
The way a cryptocurrency is kept or used may change.
For example, crypto may have been acquired for personal use and enjoyment, but ultimately it was kept or used as an investment to profit from when disposed of.
The longer it is held, the less likely it will be a personal use asset – even if an individual ultimately uses it for personal use or consumption.
Only capital gains made from personal use assets acquired for less than $10,000 are disregarded for CGT purposes. However, all capital losses made on personal use assets are disregarded.”
Capital Gains Discount
Crypto investors can utilise the ATO’s CGT discount as though they were shareholders or art collectors. Investors who choose to hold off on selling their crypto for twelve months or more might pay 50 % less CGT.
Income Tax On Cryptocurrency
Income from cryptocurrencies, such as Bitcoin and Ethereum, is viewed as assessable income & is taxable just like any other form of ordinary income.
Here are some common situations where ordinary income tax rules would apply:
- Getting paid in crypto – like a salary
- Staking rewards in crypto – like dividends
- Airdrops of crypto – like bonuses
- Defi interest – like bank account interest
- Referral bonus in crypto – like commission
Personal Income Tax Brackets 2021 / 2022:
Below are the current personal income tax brackets in Australia for the 2021 / 2022 financial year. If a situation has occurred where cryptocurrency taxation is in nor in the form of cryptocurrency capital gains but in personal income tax – the value of the crypto gained in Australian Dollars will be added to the individual’s personal income tax.
The dollar value owed to the Australian people via taxation is dependant on the total income that has been earned at the end of the financial year.
The current personal income tax brackets in Australia for 2021 / 2022 are listed below to provide some guidance on what percentage tax rate could be expected.
Taxable income – Tax on this income:
1. $0 – $18200 = $0 tax
2. $18201 – $45000 = 19 cent for each $1 over $18200
3. $45001 – $120000 = $5092 plus 32.5 cents for each $1 over $45000
4. $120000 – $180000 = $29467 plus 37 cents for each $1 over $120000
5. $180001 and over = $51667 plus 45 cents for each $1 over $180000
Taxation Obligations When Receiving Crypto (Buying, Mining Or Gifting)
In Australia, under tax laws, the purchase of assets in most cases for investment purposes is tax-free except if there’s any applicable GST.
It’s similar for cryptocurrencies, too; however, crypto assets are GST-free as well.
No tax is payable on any cryptocurrency received through a mining activity if it’s done recreationally, such as for a hobby.
If the mining operation is a business, then the taxation obligations likely change.
Consulting a taxation professional well-versed in the current Australian crypto taxation legislation for personal advice is recommended.
The Accounting Centre is a team of business accountants well versed in this space.
They offer a complimentary initial consultation for any business owner in Australia & an appointment can be requested by clicking here.
The value of any cryptocurrency token is measured in Australian dollars, so being a gifted cryptocurrency token, in most cases, it’s also exempt from taxation. Depending on the circumstances of the gifts and the value – this may change.
Note – While crypto might be tax-free on the way in, it is likely to incur CGT on the way out.
3 – Tips From The Australian Tax Office For The Management Cryptocurrency Tax Responsibilities
1. Report Disposal of Cryptocurrency
The disposal can come in many forms, but generally, it is when ownership of the token is lost or transferred.
This could be through converting a token/s into Australian Dollars, trading for another token like Bitcoin for Ethereum etc.
This transaction/movement must be reported to the ATO for capital gains tax purposes.
Regardless of whether this movement results in a capital gain or a capital loss, it needs to be reported and addressed in an annual tax return.
2. Work Out Any Capital Gains Tax
Exchanging cryptocurrency for goods, services, cash or other cryptocurrencies is typically considered a disposal for the purposes of capital gains tax (CGT). This may need to be included as a capital gain or loss in that financial year’s tax return.
Calculating the capital gain or loss post disposal requires knowing the exact value of both the cryptocurrencies purchase and sale price in Australian dollars needs to be known.
A capital gain or loss is the difference between the following in Australian Dollars:
- Cost Base: This is the cost of ownership, including the purchase price plus certain other costs associated with acquiring, holding and disposing of it)
- Capital Proceeds: This is what’s received or the market value of what’s received when the cryptocurrency is disposed of.
Note – If a net capital loss occurs, this loss can use it to reduce a capital gain in a later year; however, it cannot be deducted a net capital loss from your other assessable income.
3. Keep Records
Crypto-currency transfers need to be recorded entirely. Detailed record keeping of all related transactions & storing these records for at least five years after trading or selling the cryptocurrency.
Crypto Tax Calculators – The Easy Way To Calculate Your Crypto Tax In Australia
Using an online crypto tax calculator is an easy way to estimate how much CGT is owed to the ATO from the sale of an asset.
There are four pieces of information needed to use an online crypto tax calculator to estimate the CGT obligation from a digital currency transaction.
- The sale price
- The purchase
- Taxable income for the year asset was sold
- Length of ownership
Having each of these details ready for each transaction/disposal will allow online calculators to be used and dramatically decrease the time it takes to get a CGT estimation.
Any Tips On How To Avoid Tax On Cryptocurrency In Australia?
There is no way of evading paying taxes on cryptocurrency in Australia, and even attempting to do so can result in harsh consequences such as significant fines or even jail time. There are always tax consequences from cryptocurrency trades.
That being said, while tax cannot be avoided, it can be minimised.
Quick Tips To Minimise Your Crypto Tax In Australia:
- Investors might qualify for a 50 per cent capital gains tax offset if they hold a cryptocurrency for longer than twelve months. This is one possibility for Australian crypto tax minimisation.
- If classified as a trader, all expenses associated with operating the trading business are viewed as tax deductions. Ensure to keep records of all related expenses and speak to an accountant about this
- Ensure capital gains for the financial year are accurate. Don’t forget to offset brokerage fees and capital losses against any capital gains.
- The best way to minimise paying tax on cryptocurrency is by hiring a professional accountant who understands the asset class. If an investor or trader has made significant capital gains in the previous financial year, a quality accountant is likely to be worth the price tag.
The ATO is very serious about cryptocurrency, and it’s expected they will become even more intense as this asset class continues to grow over time.
All Australian residents involved with this asset should ensure they have a good understanding of how the associated tax rules work & their obligations under these rules.
Cryptocurrency Tax Accountants and Advisors
They offer a complimentary 60-minutes initial consultation to any person in Australia to learn about your need and if they could help.
This initial consultation can be requested by clicking here – GET YOUR FREE INITIAL CONSULTATION with The Accounting Centre.