The Ultimate Guide to Australian Cryptocurrency Tax in 2021
We totally get it! Crypto and tax is one huge headache…Hopefully, this guide will help you have a better understanding of cryptocurrency tax in Australia.
One of the most challenging aspects of being an investor is having to file your returns. There are so many formalities and faucets to consider that it often gets overwhelming.
This is the main reason why most crypto traders prefer outsourcing their accounting.
It’s, however, important to note that tax laws impact how you carry out your trades. It’s, therefore, crucial that you familiarize yourself with the tax laws so as to maximize your profits.
To get you started, here’s a simplified guide to cryptocurrency tax in Australia, complete with tips on how you can maximize your tax.
Please note that this guide is only meant to help you understand how cryptocurrency is taxed, so you may have to seek legal and financial information for more specific guidance.
Is Cryptocurrency Taxed in Australia?
If you’ve been engaging in cryptocurrency trades during the past year, you’ll have to file them in your tax returns. This includes trading, buying, selling, staking, cryptocurrency gifts, & mining and is applicable even if the transactions happened outside Australia.
Simply put, if you’ve transacted in cryptocurrency, then the Australian Tax Office (ATO) has to be notified about it.
The taxation rule came into effect in 2017 after the Australian government recognized cryptocurrency as legal. This then made digital assets subject to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, making them taxable.
What’s Your Cryptocurrency Tax Classification?
With ATO enforcing the strict tax rules on crypto trades, it’s very important that you understand the tax laws and learn how to report your crypto earnings correctly. The best place to start is by identifying whether ATO classifies you as a trader or an investor.
Who’s a Cryptocurrency Investor?
Investors are people who mainly engage in buying and selling digital assets for personal gains. This means that as an investor, you predominantly get your income from forks, airdrops, staking, and long-term capital gains.
Most of the people who deal with cryptocurrencies are deemed as investors, and their transactions are subject to Capital Gains Tax.
Who’s a Cryptocurrency Trader?
Traders, on the other hand, buy and sell cryptocurrency with the main aim of earning income. Instead of evaluating every trade as a capital gains event, they handle their profits as a form of business income.
Traders aren’t merely determined based on their trading volume or frequency of trades. For you to be considered as a trader, your crypto transactions should explicitly imply that you think of your trading as a business. ATO will also conduct an assessment to determine the same.
All You Need to Know About Capital Gains Tax
According to ATO, all digital currencies are assets and are treated the same way as company shares or house sales. This means that every time you buy, sell or gift your crypto, you have to assess the capital gains and report them as you file your tax.
Capital gains tax is only applicable if you actually transact with your digital assets. If you buy cryptocurrency but decide to hold it, it won’t be subject to any tax, even if its value decreases or increases significantly.
The Different Types of Capital Gains Events
1. Capital Gains
If you buy, sell or give away your cryptocurrency and make a profit from it, ATO will consider this as a capital gain, and you’ll have to pay taxes. For example, if you buy bitcoin worth $5,000 and then sell it 8 months later for $9000, the capital gains, in this case, are $4000 and are taxable.
2. Long term Capital Gains Tax Discount
To discourage all-day trading on crypto and share markets, the Australian government has implemented a long-term CTG discount. Simply put, it reduces the amount of tax you pay for capital gains (after you deduct your capital losses) if you hold your cryptocurrency for more than a year.
The available long-term CTG discounts include;
- 33.33% for life insurance companies that are deemed eligible and super funds that are compliant.
- 50% for resident individuals. Based on the example above, as an Australian resident, the capital gains will be considered as $2000 instead of $4000 if you didn’t have any capital losses. If you experienced a capital loss of $2000, it means that you only made a gain of $2000. Once the 50% CGT discount is applied, the taxable amount will be $1000.
- 50% deduction for foreign residents on any capital gains made after 8th May 2012.
3. Capital Losses
If you buy cryptocurrency but later sell them for less than the purchase price, you’ll have made a capital loss. For instance, if you buy bitcoin worth $5000 but later sell it for $3500, your capital loss is $1500.
Capital losses aren’t taxable, but you can use them to offset your capital gains in the same or subsequent financial years. So, if you made a capital gain of $5000 on one trade but made a capital loss of $2000 on the other, your overall capital gain will be $3000, which is taxable. That’s because the loss offsets the gain partially.
You can carry forward capital losses for as long as necessary, but if you make a capital gain in the subsequent year, you have to use them.
How Do I Calculate My Net Capital Gains?
ATO determines your net gains by bundling all your digital assets together instead of differentiating them. This means that all the profit you make from the sale of property, crypto, or shares is calculated as one.
To calculate your net capital gains, the following formula is used;
Net Capital Gains = (Total Capital Gains – Total Capital Losses (inclusive of the previous years)) * Capital Gains Discount (only applicable to disposed assets that were held for over a year)
Once the net capital gains are determined, they are included in your pre-tax salary. ATO then uses this to calculate your overall taxable income.
A Quick Example of How to Calculate Net Capital Gains
Tony buys $7000 worth of Ethereum and $5000 worth of bitcoin. 6 months later, the price of Ethereum spikes, and he sells half of his coins for $4500. In this case, his capital gains from the transaction will be;
Half of EtherEum crypto= $3500
Sold for= $4500
Capital gain: $4500 – $3500 = $1000
After 3 months, Tony sells the rest of his Ethereum for $2500 and half of his bitcoin for $2000. In this case, he’ll have made a capital loss.
Half of Ethereum: $3500
Sold for: $2500
Capital loss: $2500 – $3500= -$1000
Half of bitcoin: $2500
Sold for: $2000
Capital loss: $2000 – $2500= -$500
The total capital loss will be $1500
At the end of the financial year, Tony will have made a capital gain of $1000 and a capital loss of $1500. The overall capital loss will be $500.
Since no profits were made, he won’t have to pay any tax.
Assuming the next year, the price of bitcoin soars, and he sells the rest of his crypto for $4000, the capital gains will be;
Half of bitcoin: $2500
Sold for: $4000
Capital gain: $4000 – $2500= $1500.
Now, since tony held on to the cryptocurrency for more than a year, he’s also eligible for the long-term CTG discount of 50% after deducting his losses. This means that the net taxable capital gains for that year will be;
$1500( this year’s capital gains) – $500 (last years capital loss) = $1000
Apply long term CTG discount: 50% * $1000 = $500
The $500 net capital gain will then be added to his taxable income for the year.
What Are the Main Capital Gains Exceptions?
ATO will not consider your cryptocurrency as a capital gains event if you donate it to a registered charity. You can, however, claim the amount as a deduction on your tax return but ensure you calculate the prices fairly based on the market rates at the time of donations. Check out more ATO regulations on crypto and donations here.
2. Personal Use
If you only use your cryptocurrency as payment for goods and services or are holding less than $10,000 worth of digital currency, ATO will consider it as a personal asset and therefore not subject to capital gains tax. You should, however, note that the assessment of personal use is done on a transaction by transaction basis.
Your crypto won’t be considered for personal use if;
- You hold it for an extended period.
- Acquired it as part of a business.
- Hold it for investment purposes.
If you purchased the crypto for personal use but had to convert it to fiat money first before making a purchase, the transaction will be exempt from capital gains tax. Check out more details on personal use from the ATO’s website.
3. Stolen/ Lost Crypto
If your cryptocurrency is stolen or you’ve lost your private key and no longer have access to it, you can claim a capital loss on the value of the coins on the day they were lost. You, however, have to ask yourself one question; if the coins were insured, would an insurance company make a payout? If the answer is no, then there’s a high chance that ATO would accept the capital loss claim.
To make a claim, you need to;
I. Provide detailed evidence of proof of ownership.
II. Show proof of use.
III. Have transactions linked to your identity to and from the wallet.
How Do I Determine My Cryptocurrency Tax Rate?
As a cryptocurrency investor, the amount of tax you pay is based on your overall assessable income. The formula for calculating accessible income is Income + Capital Gains – Deductions.
ATO has a sliding scale of individual tax rates that you can use to determine the tax owed.
For cryptocurrency traders, the formula differs a bit: Income +/- Tradings Gains/Losses – Deductions.
If your cryptocurrency trades are conducted through a company registered with ASIC, your tax rate is 27.5% of all business-related income minus the deductions, similar to all other companies.
A Quick Guide to Crypto Transactions for Investors and Their Tax Impact
1. Buying cryptocurrency
ATO doesn’t consider this as a capital gains event, so you don’t have to report it as you file your returns.
2. Selling cryptocurrency
Every time you sell digital coins, you trigger a capital gains event. This is irrespective of whether you’re selling it for another cryptocurrency or fiat money. In this case, you have to calculate your net gains or loss for tax purposes.
ATO considers gifting as a capital gains event. This means that if you donate your cryptocurrency to another party, it’ll be treated the same as selling them at market rates which means you need to declare your capital gains or loss at the end of the financial year.
The person receiving the donation will only have to pay capital gains tax when they dispose of the cryptocurrency.
All stablecoins are treated the same as cryptocurrency. For instance, if you convert your USDC to bitcoin or vice versa, you will trigger a capital gains event and will have to add your gains/ losses to your net capital gains.
Airdrops are quite unique because they often happen without your consent or knowledge but still impact your tax. These are free tokens or coins sent to your wallet by ICO issuers to increase their supply as a reward or increase the awareness of an asset.
There are 2 types of tax implications;
#1. If you sell or convert them, you trigger a normal capital gains event.
#2. Their monetary value is considered as assessable income when the airdrop happens.
6. Cryptocurrency loans
These types of loans are increasing in popularity and are used by traders as a source of passive income. If you loan out your coins and get more coins back, the new coins will be considered as new assets, so their cost basis will be zero. If you, however, sell them, you’ll trigger a capital gains event.
All staking rewards are treated the same as airdrops. You need to report the rewards when they’re received as well as any gains or losses made from their sale.
Other tax rules are as follows;
- All fiat currency borrowed against cryptocurrency is not considered taxable. If your loan provider, however, liquefies your collateral, this will be considered as a capital gains event and therefore taxed.
- Any coins derived from mining are treated as new assets with a zero-cost basis. You’ll, however, be taxed when you sell them.
- Exchange Offerings (IEOs) and Initial Coin Offerings (ICOs) are considered as a crypto-to-crypto transaction, so the taxable event will happen when you receive the coins.
Are You Taxed When You Move Cryptocurrency From One Wallet to Another?
ATO doesn’t consider the movement of crypto between wallets, whether on an exchange or privately, as a capital gains event.
You should, however, monitor these transactions and keep records because all automated crypto tax software requires your full crypto transfer history to create an accurate tax report.
When Should You Report Your Cryptocurrency Tax?
The financial year in Australia runs from 1st July to 30th June, so make sure that you report all cryptocurrency transactions that happened during this period. If you prefer filing your own returns, you need to finish the process by 31st October the same year, but if you’re using a registered agent, the deadline is usually 31st march the next year.
Make sure you keep comprehensive and clear records of all your cryptocurrency transactions, including;
- Value of the digital asset at the time of the transaction in AUDs.
- Date each transaction took place.
- Purpose of the transaction, e.g. personal use or donations.
- Details of the buyer or seller.
- Evidence of cryptocurrency trade, digital wallet record, costs associated with crypto tax, exchange records, and invoices for accountants or lawyers.
Late tax reports result in fees & penalties, and ATO could scrutinize your trades more closely.
Top Tips to Minimize Your Cryptocurrency Tax
In 2020, more than 350,000 Aussie crypto traders received tax warning letters from ATO. To avoid such scenarios, you should adhere to full compliance. There are, however, various tactics you can use to reduce your tax obligation.
- Track all your transactions so that you have all the records when it’s time to file your returns.
- Take advantage of the tax deductions you can claim on your regular income if you run a crypto business.
- Make your intentions clear by highlighting whether the crypto is for personal use or as an investment.
- Hold your crypto for at least 12 months so that you can qualify for the long-term CGT discount of 50%.
- Disclose everything. Some crypto trades may be made anonymously, but ATO can track your transactions.
Adhere to the Australian Cryptocurrency Tax Guide
Cryptocurrency taxes are a murky territory, and ATO rules are constantly changing. Keep yourself updated with the recent tax laws and if you’re unsure of how to report your gains, talk to an expert.
The ATO is very strict on cryptocurrency traders, and any late filings could make you liable for high fees and penalties. They could also start to monitor your crypto trades which could hamper your experience.