Initially, cryptocurrency transactions weren’t taxed due to market unregulation. As digital currencies gained popularity, governments worldwide started regulating them, including implementing taxation.
There are distinctions between crypto investors and traders, affecting tax obligations. Cryptocurrencies can be tax-exempt if used as personal use assets, like buying goods under $10,000. Lost or stolen crypto can qualify for capital loss claims.
The ATO collects extensive data on crypto transactions for compliance. Capital gains are taxed, but a 50% CGT discount is available for assets held over 12 months. Record-keeping of crypto transactions is crucial for accurate tax reporting.
For the first couple of years since crypto was first introduced, transacting with cryptocurrency wasn’t taxable by law as the crypto market as a whole used to be widely unregulated. On the one hand, this meant more autonomy and privacy for crypto traders and investors, but on the other, it resulted in less user protection.
With digital currencies becoming more and more popular, governments around the world assigned regulatory bodies to create crypto frameworks. As a result, a lot of countries enforced cryptocurrency taxation to regulate profits from these types of money exchanges.
In this guide, we’ll take a look at how cryptocurrency is treated and taxed by the Australian Taxation Office and what you need to know in order to make a proper tax report of your crypto gains.
Also, have a look at our comparison of the best crypto tax software.
How Does the Australian Taxation Office Classify Cryptocurrency?
The official ATO definition states that cryptocurrencies are “digital asset[s] in which encryption techniques are used to regulate the generation of additional units and verify transactions on a blockchain”. These assets are typically decentralized and issued independently from a central bank or government.
According to ATO, if you’ve either acquired cryptocurrency or have disposed of it in some way, you’re liable to tax “consequences”, meaning that in most cases, you’ll need to report these crypto gains or losses at the end of every financial year.
Unlike fiat money, cryptocurrency classifies as property or a Capital Gains Tax (CGT) asset and incurs tax obligations. The capital gains and losses are calculated by taking into account the market value of the cryptocurrency in Australian Dollars (AUD) at the moment of disposal.
For instance, let’s say that Bob bought 5 BTC for $10,000 per coin, investing a total of $50,000. After a year, Bitcoin’s value jumps to $20,000 and he sells his coins for $100,000, doubling his profit. The taxable $50,000 crypto gains are added to his ordinary income to be taxed at given tax rates.
Are You a Crypto Investor or a Trader?
Knowing whether you belong to the group of crypto investors or crypto traders will help you fulfill your tax obligations accordingly, as their income incurs different taxes.
The majority of Aussies involved in crypto are investors rather than traders. This means that their primary reason for getting on the crypto bandwagon is using the coins as personal investment, a sort of a hobby that might produce passive income rather than a serious vocation and their main source of income.
If you dispose of these holdings, they will be subject to capital gains tax, especially if the disposal generates a higher profit than the market value at which you originally bought them. For this reason, it is essential that you keep track of the prices at which you bought your coins. Otherwise, the ATO will use the current market rate to calculate your recordless capital gains.
Traders are individuals or institutions that purchase and sell cryptocurrency as part of their crypto business. These crypto trading businesses adhere to trading stock rules with their profits falling under the category of ordinary income.
How do you know whether you’re classified as a crypto business? Well, for one thing, you need to engage in crypto trading with the intent of generating a large amount of income. You’re supposed to keep detailed transaction records, be transparent about your exchanges, have a well-devised marketing strategy and business plan, etc.
It’s important to know what kind of tax treatment applies to your crypto actions, although sometimes the line can be too thin even for the authorities themselves to decide. If you’re in a fog about your status, we recommend consulting a tax agent to spare you the trouble.
When Is Cryptocurrency Not Subject to Tax?
At this point, you’re probably eager to know whether there are any cases when cryptocurrency is not taxed. The short answer is yes – as long as your newly-purchased cryptocurrencies are used as personal use assets.
What this means is that you’re exempt from taxation if:
- You use your cryptocurrencies to buy goods and services for yourself from retailers or online shops that accept direct crypto payments (e.g. buying flight tickets or making a hotel reservation).
- Your capital gains remain below $10,000.
Take a look at the following example. Tom wants to buy a ticket for a basketball game, only to find out that there’s a discount for cryptocurrency purchases. He buys $150 worth of crypto and spends them on the ticket that same day. In this situation, his crypto purchase is considered a personal use asset and is disregarded for CGT purposes.
Now let’s imagine that Tom has been investing in Bitcoin for over a year now, waiting for its price to go up so that he can sell his holdings and double his profits. If during that same year, he uses part of his crypto savings to purchase a basketball game ticket, the coins he used wouldn’t qualify as personal use assets.
Therefore, according to ATO, cryptocurrencies are not personal use assets if you use them to:
- Make a long-term investment;
- Conduct crypto business activities;
- Engage in a profit-making scheme.
Also, ATO states that the longer one holds onto their crypto coins, the lower the chances they will be considered as personal use assets.
What About Taxes on Crypto That I’ve Lost or Was Stolen?
Cryptocurrency transactions are generally considered safe because they’re protected with impenetrable blockchain technology.
However, as far as crypto storage goes, you should either rely on the security measures of crypto exchange platforms that keep your private keys on their online servers or in offline vaults or take the responsibility into your own hands.
Unfortunately, it’s not uncommon for traders to lose their keys or have them stolen. In some cases, the wallet you’re using might give you an option to restore the key using a pre-generated recovery phrase or seed phrase – unless you’ve lost that one too.
As long as you can prove that your coins have truly been lost with no way to get them back, you can claim capital losses. Information you can submit that would pass for evidence includes:
- The exact date when you generated your private key and the date on which you lost it;
- The public wallet address that matches the key;
- Proof of ownership (transaction ID that can be linked to the wallet or any transfers that you’ve made through a crypto exchange where your identity is verified with a legitimate ID);
- The wallet balance at the time of the theft;
- The amount of cryptocurrency you’ve lost;
What Information Is Collected by the ATO for Cryptocurrency Taxes?
Since 2019, the ATO has been conducting a cryptocurrency data-matching program and actively gathering information on crypto transactions and crypto accounts for 2014/15 and 2019/20, initially planned to continue up to 2022/23. According to their official statement, this program “complies with the Australian Privacy Principles (APPs) and the Privacy Act 1988 (Privacy Act)” and aims to raise awareness among crypto traders and investors to be more tax compliant.
To collect this information, the ATO pools data from Australian cryptocurrency designated service providers (DSPs) that include both cryptocurrency exchanges, brokerages, third-party payment providers, and other crypto-related businesses.
So, what kind of information does the ATO collect? Personal names, place of residence, date of birth, ABN, linked IDs and bank accounts, wallet address and wallet balances, the particular cryptocurrency you’ve purchased, transaction history, etc. So much for staying under the radar.
Capital Gains Tax (CGT)
A Capital Gains Tax, or CGT, is the tax applied to the profit made from selling an asset or investment.
Typically, you would earn capital gains by selling real estate, bonds, stocks, precious metals, or property. This means that crypto assets, which we know to be classified as property, incur a CGT as well.
In the case of cryptocurrencies, any money you make from selling, trading, or gifting these coins will be treated as assessable income.
The 12-Month CGT Discount
Australian taxpayers can take advantage of the 50% CGT discount, as long as they’ve owned their cryptocurrency for over 12 months without selling or trading it. The one-year ownership should take place before the ‘CGT event’ (the moment when the capital gain or loss occurs).
For example, if you buy Ethereum (ETH) for $500 and sell it after a year and a half for $2,500, you’ll get a 50% discount on your $2,000 net capital gain: $2,000 x 50% = $1,000.
A capital loss is when you sell an asset for a lower price than the one you bought it for. For example, you bought 1 BTC for $5,000 but sold it later on for $3,000. As a result, your capital loss is $2,000.
However, you can deduct your capital losses from your capital gains made in that same income year, thus reducing your capital gains tax.
When Does It Apply?
According to ATO, a CGT event happens in one of the following situations:
- When you trade or exchange one cryptocurrency for another;
- When you exchange your cryptocurrency for fiat currency (e.g. AUD);
- When you purchase goods and services using crypto assets;
- When you sell cryptocurrency or transfer them to someone else.
Personal Use Assets
As you already know, the term personal use assets is used for crypto assets that you don’t use in business or company operations, nor as a form of investment. Once you buy them, you almost immediately dispose of them by purchasing items for personal use (e.g. buying a bicycle with crypto because the store has a crypto discount). Remember, tax exemption only applies to short-term crypto holdings.
Crypto to Crypto Transactions
Transferring cryptocurrencies from one digital wallet to another incurs no tax, provided both wallets are yours. However, exchanging one crypto for another is taxable as it means that you’re disposing of one asset and acquiring another one. The CGT will be calculated based on the market value of these assets on the day of the exchange.
Taxes on investments are disregarded if the gains are unrealized. As long as you’re holding onto your crypto assets and they’re safely stored in your wallet balance, there’s no need to pay taxes because you haven’t made any gains from your holdings yet.
Even though you don’t earn any profit by gifting someone cryptocurrency, it’s still considered disposal and subject to CGT. Conversely, if you receive crypto as a gift, you don’t need to pay crypto taxes until you dispose of them in some way.
How to Calculate CGT?
In order to meet your tax obligations and do your tax reporting, you need to calculate your CGT. Although it might sound complicated at first, it really doesn’t take much work.
The formula looks like this: The amount you earned selling your crypto minus The amount you spend when buying it (in AUD!). As you can see, it’s crucial to know the value of your cryptocurrency in AUD at the moment of both purchase and disposal.
Now, this is fairly simple if you bought or sold your cryptocurrency in exchange for AUD. However, if you made a crypto to crypto transaction, you would have to track back the AUD value of both digital assets and calculate your capital gains or losses. Also, don’t forget to take into account the fees paid for the transaction.
When talking about the difference between cryptocurrency traders and investors, we said that traders are individuals or institutions that engage in crypto businesses. By crypto businesses, we typically mean cryptocurrency exchanges or crypto mining providers who use cryptocurrency in their daily business operations.
These types of sales follow the same rules as trading stock and are therefore treated as part of your ordinary income.
Crypto Tax Records: What Do I Need to Keep Track of?
What information do you need for accurate record-keeping on cryptocurrency transactions? According to ATO, it’s important to keep track of the following:
- The exact time of the transactions;
- The AUD market value of the cryptocurrency when you executed the transaction;
- The recipient (you need their wallet address);
- The purpose of the transaction.
This information is available on your cryptocurrency exchange account or digital wallet, any receipts you might have, legal or accountant costs, etc.
Takeaways: The Important Factors to Remember
There’s no dispute that crypto taxation has a learning curve to it, especially when you first learn about your tax obligations. We hope this guide has proved to be as informative and helpful as we intended it to be and that it has set you on the right track of crypto tax planning.
What’s important to keep in mind is that ATO classifies cryptocurrencies as CGT assets or taxable properties, so you’re obliged to keep a record of all your crypto transactions, crypto gains, and crypto losses and include them in your tax report every financial year.
Disclaimer: The information provided in this article does not constitute tax advice, financial advice, or legal advice. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice.
Frequently Asked Questions
What are the tax implications for chain splits?
A chain split, also known as a hard fork, is when the original cryptocurrency blockchain splits into two separate blockchains. This usually happens due to some network disagreement, as was the case with Bitcoin and Bitcoin Cash. When this happens, blockchain users might end up with two wallets with the same balance. The Australian Tax Office doesn’t count these coins as capital gains unless you hold onto them and use them as an investment (e.g. sell them at a later date for a higher price) but you need to keep accurate records for both wallets.
What is the money value of staking rewards and airdrops?
Some consensus mechanisms like Proof of Stake reward users who “stake” coins as collateral to verify transactions and generate new blocks. The tokens received from staking are treated as ordinary income. Similarly, in the case of an airdrop, an event when cryptocurrency issuers distribute free tokens to existing token holders to boost their supply, the new coins are also treated as ordinary income.
What’s the tax treatment of DeFi tokens?
DeFi tokens are not exempt from crypto taxation because they too might be a source of income like regular cryptocurrencies. For instance, you can lend your DeFi holdings and make passive income by earning interest.
Is Bitcoin taxed differently from other cryptocurrencies?
Just because Bitcoin is the most popular cryptocurrency, it doesn’t mean that it’s going to be taxed differently. The size of your capital gains is calculated based on the market value of your coins in AUD, so the only thing that’s different about your BTC capital gains is that they might be higher compared to other digital assets.