There’s no doubt that cryptocurrency has seen a surge in popularity in recent years, with more and more people investing in Bitcoin, Ethereum, and other popular digital currencies. Australia is mirroring the trend, with Bitcoin’s value rising from around $300 in 2015 to over $80,000 in 2021.
The appeal of cryptocurrency lies in its decentralised nature, which makes it immune to government interference or manipulation. But governments around the world have started taking steps to crack down on cryptocurrency tax evasion. In Australia, for example, the government has introduced new laws that require crypto exchanges to collect identifying information and crypto transaction data from their customers.
The government has also started working with global partners to exchange information on crypto holdings, with measures designed to make it harder for people to evade capital gain taxes when using cryptocurrency.
Essentially, if you’re investing in crypto, the Australian Tax Office (ATO) wants to know about it.
Here’s what you need to know about how to pay crypto taxes in Australia.
Paying Tax on Cryptocurrency
In June 2020, the ATO sent letters to crypto investors and traders around Australia indicating that disposing of cryptocurrency must be reported for capital gain purposes. This follows previous guidance issued by the ATO concerning the tax treatment of cryptocurrency, stating cryptocurrency is to be treated as property from a tax perspective.
Since then, the ATO has clarified that disposing of cryptocurrency includes selling, exchanging, or gifting it and transferring it to another platform or wallet. The ATO has also indicated it will be undertaking data matching and auditing activity with cryptocurrency transactions to ensure that taxpayers comply with their obligations.
These latest measures underscore the importance of seeking professional advice from a crypto tax accountant in relation to cryptocurrency transactions to ensure you are meeting your tax obligations.
But, here’s what you can expect with regard to how to pay crypto taxes in Australia.
What Type of Tax Do You Need to Pay on Cryptocurrency Transactions?
According to the ATO, depending on whether you’re an investor or a trader, you’ll be subject to either capital gains tax (CGT) or income tax when you dispose of any crypto coins that you own.
What Is the Difference Between a Crypto Trader and an Investor?
In Australia, crypto traders and investors are subject to different tax treatments. Crypto investors are subject to capital gains tax, which is on the difference between the price they paid for their asset and the price at which they sold it.
On the other hand, crypto traders pay tax on their business income, including all of their profits from buying and selling crypto assets. The main difference between the two is that crypto traders carry out their investing activities as a business, while crypto investors do not.
This distinction is crucial because it determines which tax rules apply to each group.
How Do Crypto Investors Pay Capital Gains Tax?
The ATO has said that it will treat cryptocurrency investments as assets for CGT purposes. This means that investors will be liable for CGT on any profits they make when they sell, trade, or even donate their cryptocurrency holdings.
This stance is not surprising as it’s in line with the treatment of other assets, such as shares and property. So, for tax purposes, the ATO recognises cryptocurrency as an asset but not a foreign currency.
The good news is that an investor only triggers capital gains tax on the occurrence of a CGT event. In other words, if you’re an investor simply holding on to the investment, CGT liability will only be applicable when you dispose of the cryptocurrency—regardless of whether or not the price increases throughout the holding period.
Here are a few examples of transactions that will trigger capital gains tax:
How CGT Applies
Buying cryptocurrency using another cryptocurrency
The ATO considers buying one crypto coin using another crypto coin(for example, exchanging Bitcoin for Ethereum) as a capital gains tax event, so you’ll have to pay tax on the gain you make. This includes participating in ICOs (Initial Coin Offerings) or IEOs (Initial Exchange Offerings).
When you sell crypto coins airdropped for fiat currency such as Australian dollars, you’ll be liable for CGT. This includes selling forked or chain-split cryptocurrencies, airdropped coins, and coins received from mining or loans.
Using crypto to pay for goods and services
Where you purchase goods or services from companies who allow crypto transactions, the ATO considers this the same as any other crypto sale. But, the ATO offers investors a personal use asset exemption where you can buy personal use assets that are less than $10,000.
If you gift cryptocurrency, you will be liable for crypto tax. Upon gifting the cryptocurrency, the proceeds would represent the fair market value for tax purposes.
It’s worth noting that you won’t have to pay CGT on transactions that involve transferring cryptocurrency from one of your wallets to another one of your wallets.
Can You Apply for a CGT Discount or Exemption?
Fortunately, crypto investors have access to various CGT exemptions. For example, if you hold onto a specific crypto asset for more than 12 months before you dispose of it, you may qualify for a CGT discount on the taxable income depending on the following circumstances:
- 50% for resident individuals (including partners in partnerships)
- 50% for foreign resident individuals on capital gains made after 8 May 2012
- 33.33% for complying super funds and eligible life insurance companies
If you purchased cryptocurrency using a complying superannuation fund at $27,900 and sold it 18 months later for $34,200, then your net capital gain would amount to $6,300. But you would only have to pay CGT on $2,099.79 thanks to the 33.33% discount.
The ATO also allows certain CGT exemptions for the following transactions:
- Purchasing personal use assets
- Donations to registered charities
- Lost or stolen crypto assets
What Happens When You Make a Net Capital Loss?
Since the crypto market is relatively volatile, it’s more than likely that you may end up selling your cryptocurrency for less than what you purchased it for, in which case you’ll make a capital loss instead of a capital gain.
In these instances, the ATO will allow you to use that capital loss to offset future capital gains.
Crypto Traders and Income Tax
In most cases, CGT will apply, but the ATO has clarified that it, in certain circumstances, sees ordinary income generated from crypto trading as a form of business income. That means your crypto income will be subject to income tax.
Unfortunately, it’s not always clear when ordinary income tax will apply as the ATO considers the transactions on a case-by-case basis. They have, however, provided some guidance regarding the distinction between crypto traders and crypto investors. Generally, they’ll look into whether the transactions occur in a business-like manner.
For example, if your primary goal is to generate income on a daily basis and you have a trading strategy in place to accomplish that goal, the ATO will classify you as a crypto trader. So, instead of paying CGT on each transaction, the ATO will assess all his purchases as business expenses, sales, and business profit.
This means, at the end of the financial year, a trader would calculate their annual profit, submit a crypto tax report and then add this to their overall assessable income on their tax return. You’ll then be taxed according to your marginal tax rate or the company tax rate if you’ve decided to register your crypto trading business as a company.
Beyond giving guidance on the general circumstances where you’ll have to pay income tax, the ATO has also elaborated on a few specific circumstances where ordinary income crypto tax is likely to apply:
- Mining new coins
- Interest generated on lending cryptocurrency
The Importance of Keeping a Good Record Trail
If you invest in or trade with cryptocurrency, the ATO requires you to keep complete and accurate records of all your transactions. That includes everything from when the transaction took place and the value of the crypto, to what wallets or exchanges you’ve used.
You may not realise it, but record-keeping can actually be pretty simple and straightforward if you use the right tools. Several crypto tax software apps, such as Cointracker and Koinly, can help you track your activity and generate the reports you need.
The ATO has made it clear that they are closely monitoring the crypto space and will take action against anyone who doesn’t declare their profits. So crypto investors must keep track of their buys and sells and calculate their capital gains or losses for tax purposes.
If you’re unsure about how to pay crypto taxes, we highly recommend engaging the services of an expert cryptocurrency tax accountant. Here at KNS Accountants and Business Advisors, we can help you navigate the complexities of cryptocurrency taxation in Australia.
We can assist with calculating your capital gains or losses, determining your appropriate tax rate, and ensuring that you comply with your reporting requirements. We can also help you take advantage of any relevant exemptions or deductions.
With our assistance, you can ensure that you meet your tax obligations without overpaying. Contact us today to learn more about how we can help you with your cryptocurrency taxes.