The rise of cryptocurrency as an investment and trading class has been fast-paced and unprecedented. For those unfamiliar, cryptocurrency (or ‘crypto’) is a digital currency that is traded via online platforms only and often has no physical or tangible presence. It’s unique in that transactions are not verified in a centralised location (such as buying and selling shares on the Australian Stock Exchange) rather transactions are verified and handled utilising the blockchain which is a decentralised system made up of networks of computers all around the world.
Because of the rate of change in the crypto space, the ATO was lagging in providing guidance and crypto investors/traders have often felt frustrated at the lack of ATO information available to follow to ensure they were compliant.
It’s arguably one of the hardest and most misunderstood areas of tax to get right, and our tax accountants are here to help you stay compliant.
Always use a crypto tax software tool to track your transactions
There are many online systems for your crypto holdings and transactions and this should be number one on the priority list, as this will save either many hours or higher costs when it comes to tax time. Without a robust system, you’ll either be manually calculating every single transaction in an excel spreadsheet or paying your accountant additional fees to do so. You also risk missing transactions and being subject to ATO audit if they find you have not disclosed your transactions in your tax return.
There are a number of software programs available, some of the below offering a free subscription of up to 200 transactions per year, and paid offerings starting as low as $60 per year:
What is a CGT Event?
A common mistake is to only report a CGT event when there is a conversion back to currency (e.g. AUD), this is incorrect and is a heavily scrutinised area at the ATO.
- 01/06/2023 – You buy 1 Bitcoin for $40,000 AUD
- 19/06/2023 – You use 1 Bitcoin and exchange it for 15 Ethereum (market value of 15 Ethereum at the time is $50,000 AUD)
- 03/07/2023 – You sell 15 Ethereum for $45,000 AUD (transfer back to currency)
In the example above, it’s often thought that a CGT event for tax purposes only occurs at the point where 15 Ethereum is transferred back to AUD, and therefore there is a capital gain. This is not correct.
The first CGT event occurs on the day the Bitcoin is transferred to Ethereum, and therefore a $10,000 capital gain occurs in FY2022/2023 tax year.
The second CGT event occurs on the day the 15 Ethereum is transferred into $45,000 AUD. This is a $5,000 capital loss (but is in a new tax year, so will not be reported until the FY2023/2024 tax return.
In the example above, it is important to note timing, and tax will need to be paid on the $10,000 capital gain, and then a $5,000 capital loss can be claimed the following tax year. Therefore even though overall it appears as though there has only been a $5,000 gain, because of the timing of CGT events, it is separated into a $10,000 gain in one tax year, followed by a $5,000 loss in the next year.
The CGT general discount still applies to crypto as it does all asset classes, and therefore a 50% discount on the capital gain applies if the asset is held for 12 months or more.
Staking has risen in popularity and is the act of locking in your current crypto holdings to validate transactions in the blockchain. If you participate in staking, you will be rewarded with additional tokens or crypto coins. The receipt of these tokens need to be declared as ordinary income (not capital gains) at the market value at the time you receive the additional tokens/coins.
Trading vs Capital Account
This is an area that can catch taxpayers out. If you take steps that determine you are a ‘trader’, which is actively trading crypto on a short-term basis, with aspects that are more like a business than an investor, then all income and expenses are treated like a business rather than declared as capital account (CGT). This is the same as share trading vs share investing. Read more from the ATO here.
Exemption for ‘Personal Use Asset’
The ATO defines Personal Use Assets as an asset kept mainly for personal use only. An example of this could be using Bitcoin to purchase personal use goods or food and drink. In a scenario such as buying earphones from an online store that accepts Bitcoin, CGT does not apply to the use of crypto (assuming it is under $10,000), as it is being used as a form of currency as opposed to an investment to make a profit.
The ATO has announced crypto as an area of increased scrutiny due to the nature and volume of transactions, and are undertaking increased data-matching.
What this means is crypto exchanges that share data with the ATO can contain transactions that you have undertaken, and will be pre-filled in your tax return, or made available to your tax accountant as a reminder to report CGT events if they apply.
Therefore, it is important you disclose all crypto activity in your tax return, or to your tax accountant, as penalties for tax avoidance can be an additional 75% of the tax liability on top of the tax itself.
More resources during tax time:
- Carbon’s Tax Tips: Holiday Homes
- Tax Tips for Sole Traders
- ATO’s Focus Areas for Tax Time 2023: What You Need to Know
- Investing in Real Estate? Find out the Tax Benefits of Property Depreciation
- 5 Tax Deductions Tradies Can Claim
- What if I made a mistake on my individual tax return?
- Late Or Overdue Tax Return? Penalties & How To Lodge
- A Step-by-step Guide To Lodging An Individual Tax Return