Cryptocurrency tax in Australia has come a long way since bitcoin (BTC) and other cryptocurrencies rallied in late 2017. Nowadays, the Australian Tax Office (ATO) provides a significant amount of guidance on how to treat the buying and selling of cryptocurrencies from a tax standpoint.
For the most part, the basic tax principles that apply to your other assets holdings, such as shares, apply to your cryptocurrency holdings. Put another way: You are still required to record gains and losses when you sell cryptocurrency.
Australia’s Cryptocurrency Tax Treatment
In the most simple terms, if you make a profit when you sell cryptocurrency you previously acquired, you must pay tax on that gain. And if you make a loss, you must record this as well. (The most common way that people acquire cryptocurrencies is by buying them. Other ways to acquire cryptocurrencies include via airdrop and other novel distribution methods.)
What Is Cryptocurrency For Tax Purposes In Australia?
As far as the ATO’s tax treatment of cryptocurrencies is concerned, the term cryptocurrency not only describes bitcoin but also other cryptocurrencies that share similar characteristics with bitcoin.
Whilst you may argue that a cryptocurrency you hold is fundamentally different to bitcoin, the ATO will still likely deem that you are holding a taxable asset. That is to say, you are likely holding an asset that you must pay tax on if disposed of for a profit—that is, income you have generated from holding the asset.
This is the exact same tax treatment that applies when you sell shares on a stock exchange, for example.
Cryptocurrency Capital Gains Tax
The term ‘capital gain’ simply means the profit you make on a taxable capital asset. Taxable capital assets commonly held by individuals include shares, investment properties, collectables and, in more recent times, cryptocurrencies such as bitcoin and Ethereum’s ether.
Basically, you can think of a taxable capital asset as something of value that you have purchased as in investment.
Capital gains tax (CGT)
Capital gains tax (CGT) is the tax you must pay on any capital gain made upon sale of the asset.
Say you bought one bitcoin for A$10,000. You hold it for six months. The price of bitcoin goes up to $15,000. You decide to sell that one bitcoin.
To figure out your capital gain—or capital loss—you take the cost price (i.e., $10,000) and deduct it from the sale price (i.e., $15,000). This equals a capital gain of $5,000.
To encourage long-term investing, Australians are able to halve their capital gains tax rate when they sell a taxable capital asset at least 12 months after acquisition. This is called the ‘capital gains tax discount’ or ‘CGT discount’.
Using the same example as above, let’s change the six months to 18 months. Now, you’d still make a capital gain of $5,000, but that amount would be halved because you’d be eligible for the CGT discount. This means you’d add $2,500 to your taxable income.
Reporting Capital Gains & Losses In Australia
Where do you report capital gains and losses? Do you report it to the ATO after every sale? No, thankfully you only have to report this once a year to the ATO.
This reporting is done in your tax return at income item (label) 18. By far the most common CGT event happens as a result of your selling of a taxable capital asset. Other ways that CGT events can be triggered include giving away a taxable capital asset.
It’s important to note, that if you are investing simply as a hobby rather than operating as a business (see below), any losses you make cannot offset your other income (e.g. salary). Instead, if you make a capital loss for the year, you’re able to carry it forward and use it to offset any future capital gains.
Trading One Cryptocurrency For Another
Crypto investors and traders will often sell one cryptocurrency in exchange for another cryptocurrency. For example, you might sell 1 bitcoin in exchange for 45 ether. (Notice that no Australian dollars are involved in this transaction.)
Whenever you make this sort of transaction, you need to retrieve the Australian dollar ($A) equivalent values of the cryptocurrencies involved in the swap.
In regards to the above bitcoin-to-ether transaction, you’d need to figure out:
- What was the $A value of the 1 bitcoin when you acquired it?
- What was the $A value of the 1 bitcoin when you traded it for the 45 ether?
You’ll then be able to calculate your capital gain on the sale of 1 bitcoin in Australian dollars.
The $A value of the sale of your 1 bitcoin will then form the cost base of your 45 ether. This cost base will be used in the future should you sell your ether.
Tax on Cryptocurrency Airdrops
Where you acquire “free” cryptocurrency through events such as airdrops and gas distributions, the cost base for tax purposes will be zero.
If you sell this “free” cryptocurrency for $10, your gain will be $10 as there is no cost base to offset this.
What Is The Tax Rate on Cryptocurrency Gains?
The answer to this question will depend on the corporate structure that you operate in—that is, as a company, trust or individual. In Australia, the corporate tax rate for most companies is 27.5%.
For individuals in Australia, your tax rate depends on which tax bracket you fall into and takes all of your taxable income into consideration. The more income you earn, the higher tax rate you must pay.
The 2020 tax brackets for Australian individuals are as follows:
- When taxable income is $0–$18,200, tax paid is zero.
- When taxable income is $18,201–$37,000, tax paid is 19 cents per dollar over $18,200.
- When taxable income is $37,001–$90,000, tax paid is $3,752 plus 32.5 cents per dollar over $37,000.
- When taxable income is $90,001–$180,000, tax paid is $20,797 plus 37 cents per dollar over $90,000.
- When taxable income is $180,001 and higher, tax paid is $54,097 plus 45 cents per dollar over $180,000.
Distinguish Between Crypto Business & Individual Investor Or Trader
In what capacity are you buying and selling cryptocurrency? As a business? As an individual investor? As an individual trader? Knowing the answer to this question is very important as there are different implications surrounding tax treatment and reporting requirements.
There isn’t any single factor that determines if you are “in the business of buying and selling cryptocurrency.” That said, some key characteristics of running a business are listed below.
- Operating under a registered business name or Australian Business Number (ABN).
- Your intention of the operation is to make a profit.
- You repeat similar types of activities.
- Your activity is planned, organised and carried out in a business-like manner (e.g. record keeping, business-specific bank account).
If you don’t satisfy many of the above criteria, your buying and selling of cryptocurrency is likely classified as an individual investor or trader rather than part of the operations of a business.
A business will have greater reporting requirements to the ATO as well as different tax treatments of their cryptocurrency buying and selling.
One key difference is that cryptocurrency held by a business is not treated as a capital item. This means that any cryptocurrency sales do not attract any CGT and are not eligible as far as any the CGT discount goes.
Cryptocurrency Transaction Record Keeping
To make things easier come tax time, the ATO and tax professionals strongly recommend that you keep the following records for all of your cryptocurrency transactions:
- Transaction date
- Transaction value in $A
- Description of the transaction
- Receipt of the purchase or sale transaction
All of the above information will ensure you keep adequate records for the ATO.
It is important to realise that the ATO has extremely sophisticated and ever-improving data-matching technologies. This means ATO staff can likely access and track your exchange records to determine your trading history.
If you fail to report all of your transactions to the ATO, it is very likely that it will find out. It may not find out immediately after you lodge your tax return, but rather several years down the track. This could result in significant fines and penalties.
Audit trails are of the most importance when it comes to tax time.Adrian Forza (Director, Crypto Tax Australia)