Contents
- Defining crypto in australia
- Taxation of crypto transactions
- Record keeping and reporting obligations
- Trading and mining crypto
- GST and crypto
- Tax implications for initial coin offerings and airdrops
- Tax planning strategies for crypto investors
Defining crypto in australia
The Australian Taxation Office (ATO) does not provide a specific legal definition of crypto in Australia. However, it provides guidance on how crypto is treated for tax purposes. The ATO considers crypto a digital or virtual currency that uses cryptography for security and operates on a decentralized network, typically a blockchain.
The ATO views crypto as an asset for tax purposes rather than as a legal tender or currency. This means that the tax treatment of crypto transactions in Australia is primarily based on the rules governing the taxation of assets and investments.
Under Australian tax law, crypto is generally treated as property or a capital asset. This means that the disposal or sale of crypto can give rise to capital gains or losses, and the tax consequences depend on the individual’s circumstances and the holding period of the crypto.
The ATO also guides specific types of crypto transactions, such as crypto trading, mining, initial coin offerings (ICOs), and airdrops. It outlines the tax implications and reporting obligations associated with these activities.
It is important to note that the legal and regulatory landscape for crypto in Australia is continuously evolving. The Australian government and regulatory bodies, including the ATO, monitor developments in the crypto space and may introduce new legislation or guidance to address emerging issues.
Taxation of crypto transactions
CGT
In Australia, crypto is generally considered an asset for tax purposes. Individuals who dispose of their crypto may be subject to Capital Gains Tax (CGT) on the profits made. CGT applies when there is a disposal event, such as selling, exchanging, or gifting crypto. The taxable capital gain is the difference between the crypto’s cost base (purchase price) and the sale proceeds.
Calculation Of Capital Gains
Under CGT rules, the taxable capital gain is calculated by subtracting the cost base of the crypto from the sale proceeds. The cost base includes the original purchase price of the crypto, as well as any additional costs incurred during the acquisition process (e.g., transaction fees).
For example, let’s say you purchased 1 Bitcoin for AUD 10,000 and sold it for AUD 20,000. The capital gain would be AUD 10,000 (AUD 20,000 – AUD 10,000).
Holding Period And Discount Method
In Australia, if you hold the crypto for at least 12 months before selling or disposing of it, you may be eligible for a CGT discount. This means that only 50% of the capital gain will be included in your assessable income.
Using the previous example, if you held the Bitcoin for more than 12 months before selling it, the assessable capital gain would be AUD 5,000 (50% of AUD 10,000).
Reporting Capital Gains
When it comes to tax reporting, capital gains from crypto transactions need to be included in your annual income tax return. The ATO has specific labels dedicated to reporting capital gains from crypto activities, ensuring proper disclosure and compliance.
It is essential to maintain accurate records of your crypto transactions, including the dates of acquisitions and disposals, the values of the cryptocurrencies at the time of the transactions, and any associated costs. These records will help accurately calculate and report your capital gains for tax purposes.
Personal Use Assets
Cryptocurrency used for personal transactions and not connected to any business or investment activity may be considered a personal use asset. If the disposal proceeds are AUD 10,000 or less, CGT does not apply. However, CGT will still be applicable if the crypto is acquired or used as part of a profit-making scheme, such as trading or mining.
Record keeping and reporting obligations
Record Keeping
Maintaining detailed records of crypto transactions is crucial for accurately calculating capital gains and losses and fulfilling reporting obligations. The following information should be recorded:
- Date and time of each transaction: Record the exact date and time of each crypto transaction, including purchases, sales, exchanges, and transfers.
- Description and value of the crypto: Note the type of crypto involved in the transaction and its corresponding value in the relevant fiat currency (e.g., Australian dollars) at the time of the transaction.
- Purpose of the transaction: Specify the purpose or nature, whether for personal use, investment, trading, or any other relevant category.
- Details of the other party involved (if applicable): If the transaction consists of another party, such as a buyer or seller, record their details, including their name, address, and any other relevant identification information.
It is crucial to retain these records for at least five years from the relevant transaction date. Digital records, such as transaction histories from crypto exchanges or wallets, should be securely stored for future reference.
Reporting obligations
Reporting crypto transactions to the relevant tax authorities is a significant obligation. In many jurisdictions, including Australia, taxpayers are required to report crypto transactions on their annual income tax returns. The Australian Taxation Office (ATO) has specific labels dedicated to reporting crypto-related activities.
When reporting crypto transactions, you should include the following information:
- Capital gains and losses: Report any capital gains or losses realized from crypto transactions during the tax year. Calculate the gains or losses by considering the cost base, sale proceeds, and any applicable CGT discounts or offsets.
- Personal use assets: If you used crypto for personal transactions below a certain threshold (e.g., AUD 10,000 in Australia), determine whether it qualifies as a personal use asset and report accordingly.
- Business activities: If you engage in crypto trading, mining, or other business activities, report the income earned from these activities as part of your business income.
Ensuring accurate reporting and disclosure of crypto-related income and transactions is important. Failure to do so may result in penalties, audits, or other legal consequences.
Trading and mining crypto
Trading and mining crypto are two common activities in the crypto ecosystem. Both activities can have tax implications, and it is important to understand the tax considerations associated with trading and mining crypto.
1. Trading Cryptocurrency
Trading crypto involves buying and selling digital assets on exchanges or peer-to-peer platforms to take advantage of price fluctuations. From a tax perspective, trading crypto is typically considered a business or investment activity. The tax treatment differs from that of holding crypto as a capital asset.
- Income Tax: Profits derived from crypto trading are generally considered assessable income and subject to income tax. This means that the profits will be included in your taxable income and will be taxed at your applicable income tax rate. It is important to keep track of all trading transactions, including the purchase and sale prices, dates, and any associated fees.
- Deductions: Expenses incurred in the course of crypto trading may be tax-deductible. These include trading fees, transaction costs, and relevant software or subscription fees. It is advisable to keep accurate records of these expenses to claim deductions when filing your tax return.
2. Mining Cryptocurrency
Mining crypto involves validating transactions on a blockchain network and earning rewards in the form of newly minted coins or transaction fees. In the context of taxation, mining crypto is generally considered a business activity.
- Income Tax: The rewards received from mining crypto are considered ordinary income and should be included in your assessable income for tax purposes. The value of the mined crypto at the time of receipt is used to determine the taxable income.
- Deductions: Mining expenses, such as electricity costs, mining hardware, maintenance expenses, and relevant operational costs, may be tax-deductible. When filing your tax return, it is important to keep accurate records of these expenses to claim deductions.
GST and crypto
As digital currency becomes more common-place in a business context both in terms of trading and using such assets for payment in Australia, one question that commonly arises for those businesses will no doubt be: does GST apply to crypto assets? The answer, according to the ATO, depends on the context in which the crypto assets are being used.
The many types of crypto assets can be broadly divided into 2 categories, those considered to be digital currency and those that are not. Generally, digital currency is anything that uses cryptography and block chain technology to secure and record transactions (eg Bitcoin and Ethereum) and encompasses the following characteristics:
- fully interchangeable with the same digital currency;
- can be provided for payment;
- available to the public free of any substantial restriction;
- is not denominated in any country’s currency, or is denominated in a currency that is not issued by or under the authority of an Australian or foreign government;
- does not have value that is derived from or dependent on anything else;
- does not give entitlement to receive something else unless it is incidental to holding it or using it as payment;
if supplied, would not be an input taxed financial supply for a reason other than being a supply of digital currency or money.
Crypto assets that are not considered to be digital currency include non-fungible tokens (NFT), Stablecoins, and Initial coin offerings. NFTs are not considered to be a digital currency because they cannot be interchanged with other NFTs, the supply of which are usually deemed to be taxable unless they are GST free. Stablecoins are crypto assets that are pegged to the value of some other asset such as a commodity or more generally a fiat currency (ie US dollar), and are not considered to be a digital currency.
In addition, initial coin offerings are not considered to be digital currencies if they are a security (including a share or managed investment scheme), a derivative, or gives a right or entitlement to goods and services. If an initial coin offering is a security or derivative, the supply will be input taxed unless its GST free. If the offering gives a right or entitlement to goods and services, the supply will be taxable, unless the entitlement is incidental or the supply is GST free. It should also be noted that the ATO does not consider loyalty points that can only be redeemed for goods and services under the loyalty scheme and in-game tokens that cannot be used outside the game, to be digital assets.
For those trading in digital currency in exchange for money or digital currency with an Australian resident who is located in Australia, the supply will be an input taxed financial supply and GST does not need to be paid. Digital currency traded in exchange for money or digital currency with a non-resident (not located in Australia) would be GST free. If the location of the counterparty to the digital currency transaction cannot be identified, taxpayers can use the location of the digital currency exchange to treat the supply as either GST free (if the exchange is not located in Australia), or input taxed (if the exchange is located in Australia).
Digital currency used to pay for goods and services in a GST registered enterprise will be treated in the same way as money. If a taxable supply is made and digital currency is received as payment, the GST amount for that payment will need to be included in the relevant BAS and must be in Australian dollars. Conversely, where digital currency is used to make a purchase in a GST registered enterprise and a GST credit is claimed, the GST amount of the credit in the BAS must also be in Australian dollars.
The exchange rate can either be obtained from a digital currency exchange website, or agreed on between supplier and recipient. For taxpayers that account for GST on a non cash basis, the day to convert the amount is the earlier of the day the payment was received, or the transaction date or invoice date. The conversion date for taxpayers that account for GST on a cash basis can be the transaction date, invoice date or the date any of the payment is received.
Tax implications for initial coin offerings and airdrops
Initial Coin Offerings (ICOs) and airdrops are popular methods of raising capital and distributing tokens. From a tax perspective, participating in ICOs or receiving airdropped tokens may have tax consequences. The tax treatment will depend on various factors, including the intention behind acquiring the tokens, the nature of the tokens received, and any subsequent disposal events.
1. Initial Coin Offerings (ICOs)
ICOs involve the issuance of new tokens or coins to investors in exchange for established cryptocurrencies (such as Bitcoin or Ethereum) or fiat currency. From a tax perspective, ICOs can have the following implications:
- Capital Gains Tax (CGT): If you invest in an ICO by selling existing cryptocurrencies to acquire the ICO tokens, the disposal of the original cryptocurrencies may trigger a taxable event, subjecting you to CGT on any resulting capital gains.
- Income Tax: If you participate in an ICO intending to make a profit, the tokens received may be treated as assessable income, subject to income tax. The value of the tokens at the time of receipt will determine the taxable income.
- Record Keeping: It is crucial to maintain records of ICO transactions, including the date, value, and purpose of the tokens received. These records will be necessary for accurate tax reporting and calculations.
2. Airdrops
Airdrops involve the distribution of free tokens to existing crypto holders. While airdrops do not involve a direct purchase or exchange of assets, they can still have tax implications:
- Income Tax: The value of the airdropped tokens at the time of receipt may be considered assessable income and subject to income tax. The tax liability arises even though you did not pay for the tokens directly.
- Record Keeping: Similar to ICOs, it is essential to keep records of airdrops, including the date, value, and purpose of the tokens received. These records will be necessary for tax reporting and calculations.
3. Valuation Challenges
Determining the value of ICO and airdropped tokens can be challenging, especially when they are not immediately tradable on exchanges. Tax authorities may provide guidance on how to value these tokens for tax purposes. It is important to stay updated with the relevant tax regulations and seek professional advice if necessary.
Tax planning strategies for crypto investors
As a crypto investor, implementing tax planning strategies can help optimize your tax outcomes and ensure compliance with tax regulations. Consider the following strategies to manage your tax obligations effectively:
1. Keep Detailed Records
Accurate record-keeping is essential for proper tax reporting. Maintain records of all crypto transactions, including dates, values, acquisition costs, sale proceeds, and any associated fees. This information will be necessary for calculating capital gains and losses and fulfilling reporting obligations.
2. Understand Holding Periods
Different tax rates may apply based on the length of time you hold your cryptocurrencies. In many jurisdictions, holding assets for more than a specified period, typically one year, may qualify for reduced tax rates or exemptions. Plan your selling strategy to take advantage of favourable tax rates if applicable.
3. Offset Capital Gains And Losses
Capital losses can be used to offset capital gains. Consider selling assets with unrealized losses to offset any capital gains made during the tax year. Be mindful of the wash-sale rule, which may disallow losses if the same or substantially identical asset is repurchased within a specified period.
4. Consider Dollar-Cost Averaging
Consider using a dollar-cost averaging strategy instead of making large, single investments. This involves spreading your investments over regular intervals, reducing the risk of large gains in a single tax year. It can also help manage the tax impact by potentially minimizing high taxable gains.
5. Utilize Tax-Advantaged Accounts
In some jurisdictions, tax-advantaged accounts like Individual Retirement Accounts (IRAs) or Self-Invested Personal Pensions (SIPPs) provide tax benefits for long-term investments. Explore options to hold your cryptocurrencies within these accounts to potentially defer or eliminate taxes on gains until retirement or withdrawal.
6. Consider Tax Harvesting
Tax harvesting involves strategically realizing capital losses to offset capital gains. If you have investments with unrealized losses, consider selling them to offset gains in your crypto portfolio. However, be mindful of any applicable rules and restrictions in your jurisdiction.
Remember that tax laws are subject to change, and it is important to stay informed about updates and regulations in your jurisdiction. You can effectively manage your tax obligations as a crypto investor by implementing tax planning strategies, maintaining accurate records, and seeking professional guidance.
See our SMSF Bitcoin article for more information about investing in crypto via an SMSF.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.