Have you bought or sold cryptocurrency assets, such as Bitcoin, this financial year? Do you know whether your activities would be considered personal investment or business income? When it comes time to fill in your tax return, do you have all the necessary information and records to support your claim? When buying or selling cryptocurrency, it is important to understand the tax implications for when the end of your financial year comes around.
As cryptocurrency is still a relatively new technology, the tax implications are likely to evolve over time and, at times, may be quite complicated. This leaves many people turning to accountants with experience in cryptocurrency assets when filing their end-of-year taxes. However, in this article, we have compiled a simple guide on how cryptocurrency assets are classified and taxed, which, in conjunction with some solid research of your own, should be enough to give most investors and traders a basic understanding of the tax principles surrounding cryptocurrency assets.
Table of Contents
How Is Cryptocurrency Taxed?
Are You A Cryptocurrency Investor Or Trader?
How Are Cryptocurrencies Classified By The ATO?
Record Keeping For Tax Purposes, What Do You Need?
How To Determine Your Capital Gains And Losses
Minimising Your Tax Liability
The Final Word
How Is Cryptocurrency Taxed?
Fundamentally, the taxation of cryptocurrency is based on the profits (or loss) rendered when you exchange cryptocurrency for a traditional fiat currency, other crypto assets, or goods and services. This is then taxed differently, depending on whether the cryptocurrency was obtained as part of a business or professional activity, compared to all other activities which, by default, are considered a personal investment. Understanding which of these options apply to you can get a little complicated, so here is a brief rundown.
Business or Professional — Income Tax
The key here is whether the cryptocurrency was obtained during business-related activities, which could include:
- Professionally trading crypto
- Commercially mining crypto
- Operating a business which involves crypto
- Business-related cryptocurrency transactions
When making these distinctions, the Australian Tax Office (ATO) will consider the context of the activity. For instance, where they can see an expectation of commercial viability and a fully thought out business plan, they will be more likely to consider the activity business-related for tax purposes.
If your profits fall under this category, then your position will likely be taxed under the relevant personal or business income tax, as in these situations, trading stocks rules apply rather than the capital gains tax (CGT) rules. This essentially means that the proceeds from selling cryptocurrency are considered the same as ordinary income and the costs of acquiring the cryptocurrency, when it is held as trading stock, are deductible.
Personal — Capital Gains Tax
For all other cryptocurrency activities that do not fit the business criteria, assets are considered a personal investment and are subject to CGT rules rather than those applied to income tax. Examples of personal crypto activities include:
- Purchasing cryptocurrency for yourself
- Recreationally mining crypto
- Casual low-volume cryptocurrency trading
As this is a developing area of taxation law, there are, of course, exceptions which you can read about in more detail here.
Are You A Cryptocurrency Investor Or Trader?
When establishing the context of your cryptocurrency assets, it is useful to consider whether your activity most closely resembles investment or trading. The rules here mimic that of traditional share trading vs investing in that if you are holding the asset with the intent of long-term gain, you are most likely considered an investor, however, if you are making many short-term trades with a focus on profit, you are likely engaging in cryptocurrency trading.
More specifically, when determining whether your activities would be considered a cryptocurrency trading business, the ATO states that they look at the following factors:
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- The nature of the activities, namely, whether they have the express purpose of making a profit
- The repetition, volume and regularity of the trading activities, as well as how closely your activities match similar businesses
- Organizing your activity in a business-like manner. This can include factors such as having a registered business name or keeping accounts and records of trades.
- The sum of the capital being invested
How Are Cryptocurrencies Classified By The ATO?
Since the ATO does not consider cryptocurrencies to be either Australian currency or foreign currency, it is instead considered to be a property and an asset, meaning that for most tax purposes, they fall under capital gains taxation. This means that any time a CGT event occurs, such as when you sell off some of your cryptocurrency and realise a capital gain, you will incur CGT.
Other possible examples of CGT events include:
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- Trading in one cryptocurrency for another
- Converting cryptocurrency back to fiat currency
- Gifting cryptocurrency
- Purchasing goods or service with cryptocurrency
A CGT discount of 50% may be applied to your investment if you have held it for more than 12 months and, if you realise a capital loss, you may use it to deduct from a capital gain in a subsequent year.
Record Keeping For Tax Purposes, What Do You Need?
It is imperative that you keep thorough records of all transactions when dealing with cryptocurrency, both for your own awareness and since the ATO has previously stated that they are keeping a very close eye on cryptocurrency traders.
When keeping records, be sure to include the following:
- The date of the transaction
- The value of the asset at the time of the transaction (in AUD)
- The purpose of the transaction
- Who the other party of the transaction is. This can be as simple as a crypto wallet address.
- Receipts for both purchases and transfers
- Exchange records
- Agent, accountant and legal cost records
- Your digital wallet records and keys
This will assist you in preparing your tax return as having all the information safely on hand will save you time in the long run. It may also be helpful to look into our convenient Crypto Tax Calculator which can save you time by automatically pulling in your transactions and giving you a rough idea of what your tax situation may look like.
How To Determine Your Capital Gains And Losses
Figuring out your capital gains is actually rather straightforward, which is great because you must calculate it for every CGT event that takes place for your assets throughout the year. Firstly, you need to establish the value of your cryptocurrency asset. This can be done through any reputable online exchange, such as our own cryptocurrency platform. You simply need to subtract the cost of the asset as it was when you initially purchased it from the subsequent sell price, with the remaining figure representing the capital gain or loss you have made on that asset. Remember to include brokerage fees in the costing of each transaction when declaring this on your tax return.
Minimising Your Tax Liability
There are several things you can do to reduce your tax liability when dealing with cryptocurrency assets, but this once again depends on whether your crypto transactions come under the jurisdiction of business or personal use.
When holding crypto assets for personal investment, it can be beneficial to hold the asset for at least 12 months so as to trigger a CGT discount of 50%. Furthermore, while you may not be able to deduct a net capital loss from your income, you may bring it forward indefinitely to deduct against any future capital gains you may receive. If you qualify for a personal use exemption, you can avoid CGT altogether, but the conditions where this applies are rather limited and only refer to assets acquired for less than $10,000.
On the business front, you can completely offset your cryptocurrency losses against your income. This is valid, of course, as long as your cryptocurrency activities pass the non-commercial losses test, which states that your losses must be more than a hobby or lifestyle choice. Bear in mind that at the end of each financial year you must also declare any crypto (either at cost or market value) you are holding as when held by a business, it counts as a trading stock when evaluating your accessible income.
The Final Word
It is important to realise that due to the evolving nature of cryptocurrencies, there will be changes to the laws that govern their taxation. It is important to not only access the correct information, but also the most up-to-date information where possible. At eToro, we are always looking to ensure our platform is as user-friendly as possible, from our copy trading service to providing seamless and easy transaction information for when it comes to getting your taxes in order. Trade cryptocurrency with our platform today and unleash the power of the world’s best social trading platform.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past performance of a financial instrument, index or a packaged investment product are not, and should not be taken as a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.