If you’ve been trading cryptocurrencies, you may have to report it on your tax return. Working out your cryptocurrency tax can be complicated, and there are a lot of different factors you need to consider when preparing your tax return. To help you out, we have developed a quick guide to break down everything you need to know about cryptocurrency and tax in Australia.
What are cryptocurrencies?
Simply put, a cryptocurrency is a new form of digital money that operates on blockchain technology. They don’t physically exist. Like regular cash, digital currencies are accepted as a means of payment and can be used to purchase goods and services online. Bitcoin is the most popular cryptocurrency, but there are many others out there.
How they work
The Australian Tax Office (ATO) classifies cryptocurrency as an asset; therefore, you will need to assess your Capital Gains Tax every time you trade, sell or give away your cryptocurrency. Cryptocurrencies are subject to Capital Gains Tax (CGT) and income tax, however, exempt from the Goods and Services Tax (GST).
Capital gains are the tax you pay when you make a profit on a transaction. For example, if you buy a Bitcoin for $3,000 and sell it six months later for $5,000 then you’ve made a capital gain of $2,000 and will need to pay tax on that amount.
On the other hand, when cryptocurrency service providers send free coins to users (also known as airdrops), this can trigger income tax. The value of those coins must be declared as ordinary income.
How does the ATO figure out how much crypto tax I owe?
In late 2019, the ATO started collecting records from Australian cryptocurrency service providers to ensure people were tax compliant. Each time you make a transaction, there is an electronic record that is reported to the ATO from your service provider. That’s why it’s more important than ever to know what you’re doing and report your income correctly.
Am I an Investor or Trader?
The first thing you need to do is to determine whether you’re classified as an investor or trader by the ATO.
An investor is someone who buys and sells cryptocurrency for long-term personal gain. The majority of people who engage in cryptocurrency are considered to be investors, therefore their transactions are subject to Capital Gains Tax.
On the other hand, a trader is someone who carries on a business to earn income from buying and selling cryptocurrency. Rather than putting a value on capital gains, they treat their profits as business income instead. For traders, different Income Tax rules apply compared to Investor CGT Events.
To give you a better understanding, in each scenario below, we determine the type of tax liability that applies.
Buying Cryptocurrency– There are no taxes involved when you buy cryptocurrency in Australian Dollars.
Selling Cryptocurrency – Selling cryptocurrency will trigger Capital Gains Tax. Capital gains or loss can be calculated by subtracting the amount you paid for a cryptocurrency from the amount you sold it for. This figure forms part of your income and needs to be declared on your tax return.
Trading Crypto for Crypto – Buying one cryptocurrency with another will trigger Capital Gains Tax. The ATO sees a trade as two separate transactions, first, you are selling your cryptocurrency for X amount, then buying another with those earnings. So, even though you never receive the money in hand, you still need to pay tax on the sale.
Gifting Cryptocurrency – Gifting crypto is considered the same as selling it, so it is a taxable event and subject to the Capital Gains Tax. You don’t have to pay taxes when you receive cryptocurrency as a gift. However, you will be subject to the Capital Gains Tax when you dispose of the gifted cryptocurrency.
What records do I need to keep?
Whether you’re an investor or a trader you need to keep clear records, including the following information:
- The value of the transaction
- The date the transaction was completed
- The purpose of the transaction
- The details of the other party involved
Examples of useful records to keep include:
- Receipts of your cryptocurrency purchase
- Records of agent, accountant, and legal costs
- Exchange records
- Digital wallet records
- Software costs associated with the management of your tax affairs
Where do I keep these records?
There are a number of different cryptocurrencies tracking software available in the marketplace that can help you keep track of all your transactions. (CoinTracker is one example of no doubt many – however, please be aware we are not recommending this product. You should conduct your own research and investigations before deciding on a specific product).
If you need assistance with your tax return or need more information about how cryptocurrencies may affect your taxes, please contact The Hrkac Accounting Team on 03 5224 2366.
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