While cryptocurrencies are new (more or less) to the grand “money” scheme for goods and services, the taxman is not. If you’re wondering if Bitcoin or Ethereum are taxable, the short answer is yes.
Want to know if you pay fees for cryptocurrencies in Australia? The ATO Cryptocurrency Guidelines are clear on how it intends to tax cryptocurrencies. Bitcoin and other cryptocurrencies attract capital gains tax and income tax in Australia. Everything you need to know about crypto taxes in Australia in our latest guide to cryptocurrency taxes. We will cover cryptocurrency tax laws, capital gains tax on cryptocurrencies, income tax on cryptocurrencies, how to avoid cryptocurrency taxes in Australia, and every other thing you need to know about cryptocurrency in Australia.
Cryptocurrency in Australia
The Australian Tax Office (ATO) estimates that between 500,000 and 1 million Australians own cryptocurrencies.
Although cryptocurrency first came into circulation in 2009, it was not until December 2014 that the ATO launched a guide on how to incorporate cryptocurrency into existing tax legislation.
Since then, the ATO has issued general guidelines on the tax treatment of cryptocurrencies in Australia.
In March 2020, the tax office announced plans to target and police cryptocurrency traders, sending up to 350,000 letters to people reminding them of their tax obligations.
This has left many Australians a bit confused as to what these are, so I’ve broken them down for you.
How ATO Ranks Cryptocurrency
First of all, the Australian Taxation Office (ATO) considers cryptocurrencies as money, neither the Australian dollar nor any fiat currency. Instead, it considers it as “property,” an asset of CGT for tax purposes.
The official definition on the ATO website further states: “The term cryptocurrency describes a digital asset in which the developers use encryption methods to regulate the generation of units and verify transactions on blockchain technology. Cryptocurrency typically is decentralized, which means no central bank, central authority or government.”
Where a capital gain or loss is generated by crypto, the market value of the crypto in Australian dollars at the time of selling/gifting it is used to calculate it.
Are you an investor or a trader?
Understanding whether you are classified as a cryptocurrency investor or trader is key to understanding your cryptocurrency tax obligations, as investors are generally subject to capital gains tax (CGT). In contrast, traders are normally a business or profit from ordinary income.
Despite the name and the fact that you can regularly “deal” with cryptocurrencies, most Australians fall into the category of investors. Suppose your cryptocurrency trading primarily involves using it as a personal investment and most of your income comes from long-term earnings. In that case, you will likely fall into this category of investor.
In this case, capital gains and losses on cryptocurrencies are subject to capital gain or CGT.
Traders are businesses, including individual traders, that operate a business that involves cryptocurrencies. To qualify as a trader, you need to assess the facts and circumstances and consider how the Australian tax authorities will view the business. You must at least:
- Conduct your business for business reasons and in a commercially profitable manner
- Perform business activities, such as preparing business plans, purchasing capital equipment, or taking inventory per the business plan.
- Prepare accounting documents and market the company name.
These are just some of the factors that determines a business. There may be a number of other important factors, such as your work experience, hours spent at the company, company sophistication and size, use of automation, etc.
Tax treatment is not an issue of choice but an objective assessment of pertinent facts and circumstances. The same business may receive unique tax treatment, although you may have multiple assets; one is an investment activity, and the other is a trading activity. Disputes over the nature of mixed portfolio income are common, so it’s important to clearly separate and documents each asset. If you are unsure of your self-assessment, it is best to consult a cryptocurrency broker.
Capital Gains Tax (CGT)
As mentioned above, ATO classifies digital currency as a CGT asset, similar to shares of a company. Therefore, it is necessary to assess your capital gains whenever you trade, sell or offer cryptocurrencies or have any other type of divestment event. There are different types of capital gain events, and we will discuss them in the next section.
If you own (bought/gifted) any type of asset and make a profit from selling, trading, or giving away that asset, you will have to pay capital gains tax.
If you buy Ethereum for $2,000 and then sell it for $2,600, you will have a capital gain of $600 and thus bear the tax liability.
12-month CGT discount
If you have owned an asset for more than 12 months, you can benefit from a 50% CGT discount. This is a 50% discount for individual contributors and 1/3% (or 33.33333%) for compatible superfunds.
If an Australian taxpayer bought 1ETH for $700 and sold it two years later for $2500, his/her net gain will be reduced to $900 ($1800 x 50%) because he owned the ETH for more than 12 months.
If your crypto is worth less than when you originally purchased it, this is called a capital loss. For example, if you bought 1 Ethereum for $2,500 and then sold it six months later for $2000, your capital loss is $500. Fortunately for you, you can use capital losses can be used to offset capital gains.
If you realized a capital gain of $3,500 on one transaction and a capital loss of $1000 on another transaction, your total capital gain is $2,500. This loss you incur can be used to offset profits made in that financial year or can be carried forward to offset profits made on future investments in cryptocurrencies.
Application of capital gains tax, and how is it calculated?
Now that you understand the tax treatment of cryptocurrencies in Australia and their obligations let’s look at what affects Australians the most: capital gains tax or CGT.
CGT appears when you dispose of cryptocurrencies. According to the ATO, this could be due to the following common occurrences:
- Convert currencies into fiat currencies, such as the Australian dollar
- Exchanging or trading, usually as a shard of one cryptocurrency to another
- Sell or give away cryptocurrencies
- Use cryptocurrencies to purchase goods or services
Investments and capital gains tax
Cryptocurrencies are an increasingly prevalent part of investment portfolios—capital gains tax kicks in when you dispose of your cryptocurrency through any of the above methods.
However, as long as it is in your investment portfolio, regardless of changes in market value, you will not realize a capital loss or gain until you dispose of it and therefore have to pay taxes on it—capital gains on unrealized capital gains.
Capital gains tax when exchanging one cryptocurrency for another
Digital wallets can hold different types of cryptocurrencies, and while they all fall into one broad category, each type is actually considered its own CGT asset.
So when you trade one cryptocurrency for another, you are actually changing it for another. Since cryptocurrency is considered property, its value is based on the currency’s market value on the day it was purchased or traded.
To calculate capital gains tax, you need to look at the market value of the cryptocurrency you are buying at the time of the transaction.
It is important to note that if you have more than one digital wallet in which to store your cryptocurrency, the transfer from one to the other is free.
Capital gains tax when donating cryptocurrencies.
Even if you are not being paid for it, donating cryptocurrency is considered disposing of it. As such, it is subject to capital gains tax. If you are the recipient, you will not have to pay any fees when you receive the cryptocurrency; however, capital gains tax will apply if you are the sender.
How are staking cryptocurrency rewards taxed?
Staking is a mechanism to increase the security of a proof-of-stake (PoS) blockchain. Those who stake in the eligible cryptocurrency can receive rewards in return. This reward is usually accrued based on the relative proportion of cryptocurrencies the person stakes on.
Rewards received from staking on cryptocurrencies will not trigger a capital gain event. Instead, any token given to users for staking cryptocurrency is treated as common revenue by the ATO. Because stakes are not cash, you must determine the asset’s market value once it is received. Earnings from staking rewards will be added to other sources of income and taxed according to individual income level. The tax treatment of game prizes is always treated as regular income, regardless of the protocol or service used.
How is NFT income taxed?
Non-fungible tokens (NFTs) are unique digital collectibles that are an application of blockchain technology. They can be purchased on various sites and platforms and are stored in digital wallets, just like cryptocurrencies.
These assets are non-fungible in the sense that they are unique and not interchangeable. These assets derive their value from being unavailable and represent something unique, such as in-game artwork, music, or collectibles. NFT owners can digitally certify their ownership.
The Australian taxation office has issued guidelines on the tax treatment of NFTs (Non-fungible tokens) and stated that the tax treatment of non-fungible tokens follows the same principles as cryptocurrencies. For investors, the sale of an NFT will be governed by the Capital Gains Tax (CGT). A CGT event will be triggered if you buy an NFT and sell it later. If you sell NFTs for more than you bought, you will have to pay capital gains tax. If you have held NFT for more than 12 months, you are entitled to a discount on your capital gain. Since NFTs are not fungible, you need to ensure that you always match the sale to the original purchase of the same asset.