The Australian Taxation Office (ATO) released the cryptocurrency taxation laws some time ago. This passing of the tax law was a predictable move by the government, considering they have been rallying to regulate cryptocurrencies and reform the laws regarding blockchain assets.
Australia has the third-highest adoption rate of cryptocurrency globally, and Bitcoin is the highest-held asset. So naturally, the regulatory and taxation laws were going happen, it was only a matter of time.
If the cryptocurrency tax laws seem confusing to you and you want to understand them, you’ve come to the right place. Consider this article as a tax guide for your crypto assets, where we will take you through the different aspects of the laws, things you need to keep in mind while filing your tax returns, and the best practices to follow.
Classification of Cryptocurrency Assets
According to the Australian Taxation Office, cryptocurrencies are viewed as property or assets. As a result, it will be taxable under the CGT (Capital Gains Tax) or trading stock regimes.
Before we explain the tax regime, its various rules, scenarios, discounts, and exemptions, we’ll be explaining the different categories of crypto assets. This is in the context of the taxation laws. The way you hold/use a cryptocurrency determines its category and the corresponding taxation law applicable to it.
±Crypto to Crypto – As per the ATO’s current guidelines, Crypto to Crypto transactions are taxable events. For example, if you trade Bitcoin (BTC) for Ethereum (ETH) you must work out your gain or loss depending on what you originally purchased your BTC for in Australian Dollars (AUD) and what you sold your ETH for in Australian Dollars (AUD)
Personal Use Asset
If you’re using your cryptocurrencies to buy commodities or services such as tickets, hotel accommodation, food, groceries, etc., the ATO sees it as a personal use asset. In simple terms, if you’re leveraging your cryptocurrencies for your own purpose which doesn’t involve earning profits, then the digital coin is a personal use asset.
However the longer that you hold the asset before using it for personal spending the less likely this will be considered a personal use of the asset.
±The ATO have given their own determination for the purpose of clarifying the ‘personal use asset’ treatment: ±Personal use assets are CGT assets, other than collectables, used or kept mainly for the personal use or enjoyment of you or your associates. Any personal use asset you acquired for less than $10,000 is disregarded for CGT purposes.” ±Bitcoin that is kept or used mainly to make purchases of items for personal use or consumption ordinarily will be kept or used mainly for personal use. Bitcoin that is kept or used mainly for the purpose of profit-making or investment, or to facilitate purchases or sales in the course of carrying on a business is not used or kept mainly for personal use. ±The interpretation on the ATO’s website can be very ambiguous to investors and traders. What we interpret the ATO’s guidance to be is that if Bitcoin or another Cryptocurrency was purchased with the INTENTION of being used to purchase personal items that are also less than $10,000 in value, then this could be seen as using the currency for a personal transaction. ±There are varying factors that the ATO may consider: ±How long you kept the cryptocurrency for prior to spending it. The longer you hold the cryptocurrency, the less likely you can rely upon this argument. ±Did you purchase the Cryptocurrency to participate in some sort of virtual game e.g. Cryptokitties ±What was the original intention and was there a specific reason that Cryptocurrency was used to buy the good or service?
If you buy cryptocurrencies to create a diverse portfolio and hold them for long, it falls under the investment category. However, it is also important to note that the duration of holding isn’t explicitly mentioned and is relative to the events around the crypto usage.
This is because, at times, a person buys cryptocurrencies for investment but ends up spending it quickly to buy some products/services, thus making it a personal use asset. But, on the flip side, a person buys crypto for personal usage but ends up using it as an investment. So, this part is still quite subjective to the laws.
±A Cryptocurrency Investor will buy Cryptocurrency for a longer period of time and invest in a Cryptocurrency for its long term growth. Investor transactions of buying and selling cryptocurrency will usually fall into the taxation rulings of Capital Gains Tax (CGT) and will need to be reported on your income tax return. ±Sale price that you receive is called the ‘capital proceeds’ and the purchase price is called the ‘cost base’. ±Net Capital Gains needs to be reported in your income tax return as income. ±Carried Forward Losses need to be reported in your income tax return, these can offset against future capital gains. ±Capital Losses cannot be offset against other types of income, such as salary and wages, dividends or rental income, ±If you hold Cryptocurrency for longer than 12 months – 50% general discount on the Capital Gain you have made.
In staking, one pledges a part of their crypto holdings to the network and validates transactions for the network. When they do so, they receive an income or reward for every block they validate. This cryptocurrency comes under the staking category.
On the other hand, even if one decides to be a part of the staking pool and isn’t directly staking the cryptocurrency, it still falls under the same category. Tax applies once you receive the the cryptocurrency and this will be determined as income in your tax return.
Cryptocurrency networks at times create more digital assets or add more from the max supply to the circulating supply. This is to increase the volume of circulation.
When they do so, they sometimes airdrop cryptocurrencies in the wallets of existing users to appreciate their loyalty to the network. When you receive cryptocurrency in this manner, it comes under the category of the airdrop.
This category is similar to the staking operations but includes any kind of cryptocurrency reward. So, for instance, if you’re participating in lending/borrowing, yield farming, liquidity-providing projects, or protocols, then the income you receive will fall under the rewards category.
Since technically, yield farming and liquidity-providing projects fall under the staking category, you can also consider this category to be a mere subset of the staking category.
There are mainly three categories of taxes that can be applicable to the above categories. We’ll be taking you through each of those in detail.
Capital Gains Tax (CGT)
The CGT is applicable for categories where capital is gained and profits are made. This means that trading, staking, rewards, airdrops, and investment will be associated with CGT.
The CGT applies to the capital proceeds or gains. The formula for this is simple.
Cost Base – Sale Price = Capital Proceeds.
- Cost Base is the price at which the cryptocurrency is bought.
- Sale Price is the price at which the cryptocurrency is disposed off.
- Capital Proceeds are the profit or loss you gained at the end of the transaction.
The CGT applies to these proceeds. You can also leverage the step-by-step guide for calculating your CGT.
A Cryptocurrency Investor will usually buy Cryptocurrency for a longer period of time and invest in a Cryptocurrency for its long term growth. Investors are usually deemed to be investing into a Cryptocurrency on Capital account, whereby the transactions of buying and selling cryptocurrency fall into the taxation rulings of Capital Gains Tax. Investors are usually not seen as running a business, but merely investing for the appreciation of the asset.
If you are deemed to be a Cryptocurrency Investor you will need to report your Capital Gains or Losses as a Capital Gains Tax (CGT) in your income tax return.
Under Capital Gains Tax, the sale price that you receive is called the ‘capital proceeds’ and the purchase price is called the ‘cost base’. You make a capital gain if:
- the capital proceeds are greater than the cost base or
- You make a capital loss if the capital proceeds are less than the cost base
As you are not operating a business, expenses such as trading fees will be attributed directly to the cost base or reduce your sale proceeds, thereby reducing your capital gain or increasing your capital loss.
Ordinary Income Tax
While calculating the total income tax, a part of your earnings through cryptocurrencies can also fall under the ordinary income as well, this may include things like staking or interest received on staking or lending your cryptocurrency.
If your usual course of business involves dealing with cryptocurrencies, then the ordinary tax will be applied to your earned gains.
Specific to Cryptocurrency trading – the ATO has provided a list of characteristics that may result in your activities being treated as a trading business:
a. You are going about in a business like manner;
b. You have a high volume of buy and sell transactions;
c. You have a large amount of capital traded. ±A trading business is generally reported similar to a business who sells goods, where the sales of Cryptocurrencies are recorded as assessable income and purchases are treated as cost of sales.
Stocktake – Must be taken at the 30th of June to ensure you know what your ending balance was.
Business income tax deductions
Computer expenses and software
Training and Education
If you swap or exchange cryptocurrencies within the business, then the trading stock rules apply to the gains. If your earnings are less than $5000, then no tax will be applied. However, if the gains are $5000 or more, the usual tax will apply.
However, if you decide to hold your assets, they would come under the investment category, and the CGT tax regime will apply to the holdings.
These are three broad categories of tax regimes that will apply to your transactions with cryptocurrencies. However, there are numerous exemptions and discounts.
Discounts and Exemptions
There are numerous discounts and tax exemptions for assets regarding the various laws. We’ve listed them all below:
- If you hold your cryptocurrencies for more than 12 months, you will get a discount of 50% for your CGT. This means that the CGT will apply only to half of your gains.
- There is no tax for buying cryptocurrency with fiat currency. The taxes are associated only with disposing of cryptocurrency by selling them, swapping them, or gifting them.
Examples and Tax Scenarios
We’ll be giving you an example of the various cryptocurrency asset categories and what kind of tax applies to them. This way, you’ll find the taxation laws more understandable and relate the scenarios to your own circumstances.
Example 1: Personal Use Asset
Let’s say John buys 2 Bitcoins from an exchange and uses these to book flight tickets and accommodation for a vacation after a few days. This means these 2 Bitcoins come under the category of personal use assets. Meaning no tax applies to these assets.
Example 2: Investment
If John changed his plan last minute and didn’t want to buy anything with the 2 Bitcoins, he would be holding the asset. However, if he holds these for a longer period of time, the asset will become an investment asset, on which CGT will be applicable.
If he decided to hold the 2 Bitcoins for 12 months, he would receive a discount of 50%. That means the CGT will apply only to half of the gains he earned.
Example 3: Trading, Staking, and Airdrops
If John decides to trade the 2 Bitcoins for Ethereum and stakes a certain amount, his gains on the exchange and the rewards he receives will be subject to the CGT. Furthermore, any rewards he receives as part staking will be subject to income tax.
Example 4: Business Usage
Earlier, we mentioned that trading is taxable under the CGT regime. However, if trading is your regular business, then trading operations will fall under the trading stock rules of taxation.
Besides this, if your business requires you to pay a salary or reduce losses, those transactions will also be subject to the usual income tax laws. Here, your crypto assets will be equated with the value of Australian Dollars, and then the tax will be calculated.
As you can see, there is some sort of ambiguity in specific scenarios where you might be wondering if the crypto transaction is taxable or not, even if it is, which tax regime would be applicable.
To solve this, there are a few best practices you need to be aware of while calculating your taxes and filing for returns.
- Learn to maintain proper records of your cryptocurrency transactions.
- While recording these, you need to know the date, the amount, the purpose, and the other party involved.
- Besides this, keep receipts, costs associated with software to manage your taxes, exchange records, and legal costs.
- When in doubt, refer to the taxation laws on the official ATO website since they form the rules and have all the necessary info available.
- However, if it is confusing, it is ideal to discuss the transactions with one of our team of experts.
Cryptocurrency regulations and taxation laws seem to cover most of the scenarios people might come across. But, there’s still room for a lot of ambiguity. This is because the blockchain space, in general, is in its nascent stages, and the laws would need to evolve as the industry does.
While these laws seem relatively favourable to the people who deal with cryptocurrencies, it would be interesting to see how they progress and evolve with time.