A guide to understanding crypto taxes and other digital assets taxation
15 June 2022
Cryptocurrency assets are an increasingly popular investment. By the end of 2021, more than 800,000 Australian taxpayers had completed a digital asset transaction, including selling cryptocurrency. If you’ve invested in digital currencies, do you know the tax impact on your earnings or losses? In some cases, you may even qualify for a tax break.
Because regulations for crypto in Australia are frequently changing, the aid of a trusted tax consultant can help you navigate tax implications of crypto come tax season. Despite being used to buy things, crypto is classified as an asset and not a currency. Before you lodge your return, let’s talk about digital asset taxation -- specifically crypto taxes -- and what you can do to help protect yourself when it comes to lodging.
Crypto and the ATO
First things first: Does the Australian Taxation Office (ATO) even know that you’re trading in crypto?
The ATO can track your cryptocurrency transactions in a few ways. If you take fiat currency (Australian dollars, for instance) from your bank and invest it in crypto, the ATO is likely to have the data. The ATO also has access to data from most financial institutions -- so don’t try to hide your transactions.
The ATO can also track transactions related to cryptocurrency online exchanges. When you sign up for a crypto designated service provider (DSP) you must provide “Know Your Customer” (KYC) information. The ATO has access to KYC data so it’s aware when you are buying and selling a crypto asset. If your tax return does not match the crypto trading and selling data they have on file, you could be fined.
Calculating taxes on crypto
Many Australian taxpayers run into issues when they’re trying to determine their tax situation related to crypto. Even though cryptocurrency is billed as, well, a currency -- the government considers it an asset and not money or foreign currency. This makes figuring out your digital asset taxation a little tricky at times.
Let’s talk about a few common scenarios related to block-chain based transactions and if you’ll be taxed.
You’re buying 10 units of Bitcoin for $1,000. Will you be taxed on this purchase?
No. You are not taxed for cryptocurrency purchases. If you only made purchases this year and did not sell or trade any crypto, your crypto activity won’t have any tax impacts. Still, the ATO recommends keeping records of all crypto acquisitions. Hold on to records related to purchase transactions, the type of cryptocurrency, the price in fiat currency, and when the transaction took place.
You’re trading one type of crypto for another. Will you be taxed?
Yes. If you trade your ten units of Bitcoin for another type of crypto, the ATO will expect you to report the transaction on your taxes. Trading is a type of disposal and therefore subject to taxation.
You gift crypto to a family member. Is this transaction taxed?
Yes. Gifting cryptocurrency is also considered a type of disposal. Since the ATO assesses taxes on every crypto disposal, you will need to report the gifting of this asset on your return.
You transfer crypto from one digital wallet to another. Is this a taxable transaction?
No. According to the ATO, if you transfer crypto between digital wallets, you don’t need to report it as a disposal as long as you maintain ownership of the digital asset.
You sell your ten units of Bitcoin and turn it into fiat currency. Are there tax implications?
Yes. Any time you sell your cryptocurrency you must report it on your return. If you made a gain, you will be assessed capital gains tax (CGT) on the difference between your purchase price and the sale price.
How much tax do you pay on crypto in Australia?
Crypto assets are subject to CGT in Australia. If you own your asset for at least 12 months, you will receive a CGT discount of 50%. This means you only pay CGT on half of the asset’s increased value. For instance, if you pay a base rate of $1,000 fiat Australian dollars for a cryptocurrency and sell it for $2,000, your capital gain is $1,000. After holding the asset for 12 months, you will only have to pay CGT on $500.
Capital gains taxed is assessed at your marginal income tax rate. Your income tax rate is based on your taxable income. You can find out more about individual income tax rates on the ATO website.
Some cryptocurrency transactions are also subject to income tax. This is usually the case if you are operating your crypto purchases and sales as a business rather than a personal investment strategy.
Crypto investor vs. trader
The ATO categorises everyone who buys and sells crypto into one of two categories: investors and traders. Most individuals who hold onto crypto for the long term will fall under the investor tax rules. Here are some things to consider before deciding which category you belong to; remember, there are serious tax differences between the two, so you want to get it right before you lodge your tax return.
Investors: A person who buys and sells cryptocurrency for themselves to gradually build wealth over time is usually considered an investor. Investors hold onto their crypto for at least 12 months before they dispose of it most of the time, which affords them the 50% CGT tax discount. Investors don’t make their living by trading crypto; for an investor, crypto is part of an investment portfolio and trading may be a hobby. In most cases, investors are not assessed income tax on their crypto earnings.
Traders: If you are buying and selling crypto for short-term gains as a source of income, you are considered a trader by the ATO. Traders buy and sell frequently and may be doing it as a business to help other people invest. Traders take advantage of the changing market. They don’t buy and hold for many months, but rather closely monitor the market to capitalise on fast returns. The ATO will consider cryptocurrency trading a commercial activity in this situation. Traders are assessed income tax on their entire crypto earnings based on their marginal tax rate. You will not be eligible for the 50% tax break because you are not taxed on one-time capital gains.
If you’re not sure about whether you’re an investor or a trader, ask yourself a few questions:
Am I buying and selling crypto for just myself, or am I also trading it on behalf of other people?
Do I hold the cryptocurrency for long periods of time, or am I selling it fast to maximise a quick financial return?
Is the purpose of my crypto currency habit to build gradual wealth or am I relying on crypto trading as my primary source of income?
Is cryptocurrency one part of my financial investment portfolio, or have I put all my eggs in this one basket?
Since there are such different tax impacts for investors and traders, you need to make sure you are properly classifying yourself on your tax return. If you fail to pay required income tax or try to claim the CGT discount when you don’t qualify… the penalties can add up quickly.
Crypto tax breaks
There are a few ways to enjoy tax breaks on your cryptocurrency sales and trades. You’ll have better benefits if you remain an individual investor, though traders may also be able to lower their tax burden as well. Two of the tax breaks are easy to understand and one is a bit trickier. Let’s break it down.
1. Capital gains tax discount
As we’ve mentioned above, individual crypto sellers can claim a 50% discount on their capital gains tax if they held their investment for at least one year. You won’t pay capital gains tax if you make a loss on the crypto at the time of disposal.
2. Tax free income
Australians do not pay income tax on their first $18,200 of taxable income. If you are considered a crypto trader, this provides crypto traders with a tax-free portion of your taxable income. Keep in mind that tax-free thresholds are subject to change, so you should check the rules each year before you lodge your return.
3. Personal use assets
This potential tax break is a bit more complex than the first two opportunities. A personal use asset is something you keep or use for your personal enjoyment. If you purchase crypto and immediately use it for other digital asset transactions or payments, it may be considered a personal use asset. In this case, you wouldn’t be taxed on the disposal of your cryptocurrency.
For instance, let’s say you buy $20 of cryptocurrency to buy a virtual comic book. You are disposing of the crypto immediately for an asset that is exclusively for your own enjoyment. If you turn over the crypto to buy another asset within a few days, the cryptocurrency will fall under the personal use asset exemption and you don’t need to pay taxes on the disposal.
There are specific rules for when crypto can be claimed as a personal use asset. You must meet these criteria:
You can’t use more than $10,000 worth of crypto to purchase another asset if you want the transaction to fall under the personal use asset exemption.
You must be using the crypto to purchase something else that will be personally consumed by you. This could be an NFT, a movie, an audio book, or a similar asset.
You can’t hold onto the crypto for long. If you buy the crypto, hold it for a few months, and then use it to buy something, the ATO is less likely to allow you to claim it as a personal use asset.
Taxes on NFTs
The ATO has a very specific set of rules for income taxes on non-fungible tokens (NFTs). They are not considered digital currency. As with other digital asset taxation, the taxation rules vary depending on factors like how you use an NFT and how long you own it. Here are the basic rules:
If you are using the NFT as part of a business or other profit-making scheme, it will be considered taxable.
You may also have to pay taxes on your NFT if you dispose of (sell) the NFT and earn a profit. In this case the NFT sale would be subject to capital gains tax.
NFTs that are traded as stock and subject to a revenue account are also taxable when sold or traded.
In some cases, an NFT may be considered a personal use asset and not taxed at all. For instance, if you buy an NFT of a short audio clip and use it for your personal enjoyment, it’s not going to be taxed. If you leverage the NFT to make a personal profit in some way, it is no longer a personal use asset.
NFT taxation is especially tricky because there are so many possible uses and unique situations. Enlisting the help of a tax consultant will help you avoid a costly misstep when you complete your tax return.
Taxes on Staking and Airdrops
Staking and Airdrops are becoming more common in the crypto space with staking often occurring daily on eligible tokens.
A user will receive staking rewards when they commit their held tokens to assist the network to create new tokens within the community. As a reward for this, the tokens that are staked receive a reward in the form of more of the applicable token. When this occurs, the owner needs to classify the staking rewards as ordinary income in the financial year it was received.
In addition to this, the value of the staking rewards is added to the cost base of the token for when the investor sells their interest in the token.
Similar to staking, Airdrops are a reward for holding a specific token, the difference being that the airdropped token is different to the original token held (however normally part of the same crypto ecosystem).
As with staking, the value of the airdropped token is assessable income in the financial year it is earnt. The value of the airdrop also becomes the cost base of the new token for when the investor sells their interest in the token.
Getting guidance for crypto taxes and other digital assets
It’s complicated to calculate taxes on your digital transaction. Wading through the waters of crypto classifications and NFT rules is a lot for an individual to handle on their own. So you don’t get lost at sea, let Findex help you determine what you owe and when.
In addition to helping you with digital asset taxation issues, Findex can also deliver business advisory, corporate finance, and general insurance services. We can also offer advice for your entire wealth management strategy, not just your crypto and other digital assets. Get in touch today so we can start planning your financial future.