In 2021, the popularity of cryptocurrency rose significantly and consequently became more trusted by the general public. In November 2021, the Commonwealth Bank announced its intentions to allow customers to buy and trade crypto via their banking app.
Despite crypto becoming a common topic of conversation amongst Australians, there are plenty of misconceptions about the digital currency and plenty of tax-related requirements that must be followed by individuals who make a profit off their crypto-related investments.
The ATO Treats Cryptocurrency as An Asset
At the present time, The Australian Tax Office (ATO) treats crypto as a form of property and as an asset for tax purposes. Cryptocurrency still has some way to go before being used, or taxed, as legal tender in Australia.
It is therefore helpful to use the more accurate label of “crypto asset” to describe cryptocurrency for tax purposes within the Australian tax system.
An asset can be best described as a resource that you own, with economic value that’s projected to provide a future return. Other examples of an asset besides cryptocurrency include; shares, investment property, and collectables.
Capital Gains Tax (CGT)
When you are calculating the tax owed on crypto gains, all of the usual considerations apply.
You will be required to know the cost base of the crypto asset at acquisition, its price at disposal, and convert all figures into Australian dollars. A crypto capital gain or loss could be triggered by four disposals:
- Selling crypto like Bitcoin for any fiat currency, like AUD
- Swapping crypto for crypto, like Bitcoin to Ethereum
- Spending crypto to obtain goods or services unless the personal use asset rule applies
- Giving crypto as a gift.
Capital Gains Discount
Crypto investors should also be aware that they are able to take advantage of the ATO’s CGT discount, as if they were shareholders or art collectors. Furthermore, investors of crypto who hold off disposing of their crypto for 12 months or more may pay 50 percent less CGT.
Crypto income is liable for income tax in the same way that salaries, dividends, and bonuses are taxed. In crypto terms, the parallels look roughly like this:
- Getting paid in crypto – like a salary
- Staking rewards – like dividends
- Airdrops – like bonuses
- DeFi interest – like bank account interest
- Referral bonus – like commission
Buying Cryptocurrency Is Tax-Free
Under current Australian laws, the purchase of an asset for investment is tax-free, bar any applicable GST. The same applies to cryptocurrency, except that crypto is GST-free as well.
You also won’t pay tax on any cryptocurrency when you receive it through mining, provided you are only mining at a hobby level, or if you receive crypto as a gift.
In each of these cases, while crypto might be tax-free on the way in, it is likely to incur CGT at the point of disposal.
You Could Pay Both Income and CGT
How you receive your crypto and how you let it go are seen as two separate events. If you were to receive an airdrop worth A$50 on 1st January, that sum would form part of your total taxable income.
On 1st June, you decide to convert the airdropped coins into Australian dollars, and you discover that they are now worth A$80. As you paid no fees on receiving the airdropped coins, your gain is a straightforward calculation of A$80 – A$50 = A$30.
You will need to pay CGT on that A$30, even though you are paying income tax on the original A$50.
Now, imagine you held off converting your airdropped coins to dollars until 1st January of the following year. You will pay 50 percent less capital gains tax for holding onto your asset for 12 months or more.
What Happens If I Make A Capital Loss?
If your cryptocurrency-related sale proceeds are less than your cost base, then you will make a capital loss. A capital loss can be offset against capital gains arising in the same year and, to the extent they are not used up, they can be carried forward indefinitely until capital gains arise to absorb them. Capital losses can only be offset against capital gains, but not against any other form of income.
If you dispose of cryptocurrency during the year and net a capital gain, you might want to consider disposing of any other assets you own that are sitting at a loss. This way the capital loss can be offset against the capital gain. If you lose your coins, they are stolen or you are otherwise subject to fraud, you may be able to claim the value of your losses as a capital loss.
What Is the ATO Doing to Tax Cryptocurrency?
The Australian Tax Office (ATO) has estimated that somewhere between 500,000 and one million Australians have currently invested in crypto-related assets. Many of these individuals have failed, or will fail, to properly report the profits they have made for tax purposes.
In response to this common occurrence, the ATO is gathering bulk records from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program which aims to ensure that people trading in cryptocurrency are paying the amount of tax that is required for them to pay.
The data that has been provided to the ATO consists of cryptocurrency sales and purchase information. The data will identify Australian taxpayers who have failed to disclose their income details correctly.
A number of Australian taxpayers may find themselves being contacted by the ATO as a result of the data matching exercise. Those who are contacted will be given an opportunity to amend their tax returns to include any information highlighted by the ATO.
Individuals will have a timeframe of 28 days to clarify any information that has been obtained via the data provider. Thousands of letters have already been issued to taxpayers across the country and more will continue to be sent.
Recipients of the letters who fail to modify their tax return to include the missing transactions will be met with more forceful compliance action which could include a full tax audit.