Cryptocurrency has undoubtedly experienced explosive growth over the last couple of years – but how does tax on cryptocurrency in Australia work?

With governments worldwide cracking down on managing the tax implications of cryptocurrency, you would likely have had to start reporting cryptocurrency on your annual tax return. 

In Australia, it’s no different – if you’re buying, selling, trading, and even mining cryptocurrency – the Australian Tax Office wants to know about it. 

So what do you need to know?

Here’s a guide to how the tax on cryptocurrency in Australia works. 

Do You Have To Pay Tax On Cryptocurrency in Australia?

Towards the end of 2019, the Australian Tax Office (ATO) began collecting records from various designated cryptocurrency services providers such as exchanges, brokerage services, and payment facilitators to ensure that traders and investors were paying tax on their earnings.

In June 2020, the ATO sent letters out to crypto investors and traders around Australia indicating that disposing of cryptocurrency must be reported for capital gain purposes. 

This data collection process established that all cryptocurrency transactions you make would leave an electronic record. 

So, yes, you will have to pay tax on cryptocurrency in Australia. And not just on the sale of your cryptocurrency coins. The ATO wants to know if you’re buying, trading, mining, staking, or giving and receiving cryptos – regardless of whether the transaction was processed here using the Australian Dollar, in El Salvador, or any other country around the world.  

When it comes time to lodge your annual tax return, the ATO will compare it with the data and records collected from the designated service providers (DSP). This way, they can ensure that your tax report matches your cryptocurrency transactions. 

How Does the ATO Tax Cryptocurrencies?

In Australia, cryptocurrency is subject to two types of tax: 

• Capital Gains Taxes (CGT); and 
• Income Tax. 

Suppose you’re primarily buying and selling cryptocurrencies for investment purposes. In that case, the ATO considers you a crypto investor, which means that your primary goal is to experience long-term capital growth – similar to property or business investors. 

So, if you would have to sell your cryptocurrency, your transaction would be subject to capital gains tax (CGT). 

However, if you’re a trader, your primary purpose is to earn an income from buying and selling various cryptocurrencies. According to the ATO, that means that you’re conducting a business, and you’ll be subject to pay tax on your taxable income. 

When Does Capital Gains Tax Apply?

Like holding shares in a company, you’ll have to evaluate your capital gain each time you sell, trade or donate your cryptocurrencies.

However, it’s worth noting that you’ll only trigger a capital gains tax event if you do something with your crypto. If you’re buying it simply to hold it, you won’t trigger any CGT liability regardless of whether your asset value increases or not – similar to buying and holding property. 

The ATO doesn’t see cryptocurrencies as Australian or foreign currency. Instead, they consider it to be property. So, for capital gains tax purposes, cryptocurrencies are assets. You’ll be liable for capital gains once you:

• sell a cryptocurrency,
• send a cryptocurrency as a gift,
• trade crypto for another fiat currency or crypto,
• convert to a currency, such as Australian dollars, and
• buy goods and services.

For example, if you purchased half bitcoin at $29,000 and sold it four months later for $32,500, then you have made a capital gain of $3,500, and you’ll have to pay tax on that amount. 

Here is a brief breakdown of how capital gains tax applies: 

Can You Reduce Your Cryptocurrency Capital Gains Tax liability?

If you hold onto the cryptocurrency you’ve purchased for more than 12 months before selling it, you can qualify for the long-term capital gains tax discount. 

If you have held the crypto asset for long enough, depending on whether you’re a resident, foreign resident or whether you used your super fund to invest, you’ll be eligible to claim the following discounts (after your capital losses are deducted): 

• 50% for resident individuals (including partners in partnerships)
• 50% for foreign resident individuals on capital gains made after 8 May 2012
• 33.33% for complying super funds and eligible life insurance companies

If we return to the example above, if you purchased half of a bitcoin as an Australian resident at $29,000 and sold it 16 months later for $32,500, then you have made a capital gain of $3,500. But you would only have to pay tax on half that amount, i.e. $1,750. 

What About Capital Losses?

Suppose you sell your cryptocurrency at a lesser amount compared to what you purchased it for. For example, you purchased half a bitcoin at $29,000 but sold it for $27,300. If that’s the case, you would have made a capital loss. 

You can use any capital loss to offset a capital gain (although you can’t use it to offset the income you generate from your job). 

For example, if you made a gain of $3,500 in one trade but made a loss of $1,700 in another, your overall capital gain is only $1,800. 

If you don’t make a capital gain in the same financial year as the loss, you can either continue to carry your capital loss forward into subsequent financial years until you make a capital gain.

Are There Any CGT Exceptions?

Beyond being able to reduce your capital gains tax liability or offset your losses, the ATO also allows crypto investors to be CGT exempt in certain circumstances, including: 

• Personal use asset exemption: where investors hold less than $10,000 in cryptocurrency and mainly use it to buy goods and services, it’s considered personal use assets and not liable for CGT. Whether or not your cryptos are considered a personal use asset is assessed on a transaction basis.
• Donations to a registered charity: a donation is not considered a CGT even if the donation was made to a registered charity.
• Lost or stolen cryptocurrency assets – if you have somehow lost access to your crypto coins or they have been stolen, you can claim the value (on the day they were lost or stolen) as a capital loss. But the ATO will want detailed evidence of your ownership. 

When Does Income Tax Apply?

People who engage with cryptocurrency activities are most commonly considered investors and will generally have to pay CGT in instances referred to in the table above. 

However, if you’re trading in cryptocurrencies intending to make a profit, then you’ll be taxed as a business – so income tax applies. According to the ATO, a good gauge of whether you’re considered a crypto trader and not just an investor is to assess whether your operations are occurring in a business-like manner. 

In other words, are you focusing on generating short-term profit? Are you transacting daily? Do you have a trading strategy?

For example, Adam considers himself a cryptocurrency trader for tax purposes. In his first year as a trader, he invested $620,000 in cryptocurrencies. He sells half of his purchases (worth $310,000)  for $430,000. His total transaction fees for the year were $2,200: 

$420,000 (sales) – $310,000 (less half of his cryptos) – $2,200 (fees) = $107,800

So, in his first financial year as a trader, Adam made $107,800 ordinary income, which must be declared in his income tax return. 

In the example above, Adam is taxed as a sole trader. Instead of assessing whether or not each transaction triggers CGT liability, his purchases are considered trading purchases (similar to business expenses), and his sales are considered ordinary income (similar to business profit).

So, at the end of the financial year, Adam would calculate his profit and add it to his overall assessable income. 

Income tax will generally be applicable in the following circumstances: 

• Airdrops: new coin types often send an audience free coins as part of a marketing campaign – the ATO considers this as ordinary income, and you’ll need to pay income tax on their value on the date that you received it. 
• Mining: any proceeds you receive from creating a new bitcoin or altcoin is taxed as assessable income, and you’ll need to declare it in your annual tax return. If you sell these coins, they’ll also be subject to capital gains tax. 
• Lending cryptocurrencies: any interest received from lending your cryptocurrency is considered assessable income – the ATO treats it similarly to mining. 

What Are the Income Tax Rates for Cryptocurrencies?

As with other forms of income, any profit you make from trading your cryptocurrencies will be taxed at the marginal rate applicable for your tax bracket.

And if you have registered your crypto trading business with ASIC, you would pay the company tax rate of 27.5% on business profits. 

You can access the relevant tax brackets on the ATO’s website.

Record Keeping Responsibilities 

Regardless of whether you’re a cryptocurrency trader or investor, you must keep comprehensive records of all your transactions, including: 

• when the transaction occurred, 
• the crypto value at the time of  the transaction, 
• the purpose of the transactions, and 
• basic details of who you sold or bought the cryptos from. 

It’s also vital that you have documents such as your receipts, digital wallet records, accounting invoices, and exchange records, easily accessible should you need to supply the ATO with evidence. 

Key Takeaways

With the ATO clamping down on ensuring cryptocurrency investors and traders meet their tax obligations, it’s more important now than ever to ensure that you are keeping on top of things. 

Before understanding what tax you’re liable for, you need to establish whether you’re a: 

• trader; or 
• investor. 

In most cases, people engaging in cryptocurrency activities are investors with the purpose of experiencing long-term capital growth – in which case you won’t be liable for income tax, but some circumstances will require you to pay capital gains tax. 

If you are trading in cryptocurrency to make a profit, then you’ll have to pay income tax as well. 

The rules are strict regarding what value you’ll have to pay tax on, so you must keep accurate records. Various apps automatically sync your transactions and apply ATO tax rules to calculate your tax liability, including: 

• Cointracker
• Koinly 
• CoinJar

Cryptocurrency is a lot to take in and can be confusing because it’s constantly changing. So, if you’re unsure about your tax obligations, it’s best to seek advice from an expert accountant or tax agent. 

At Box Advisory Services, our small team of experienced accountants can help you navigate through your tax obligations and help you prepare your annual tax return. 

To find out how we can help you, book a free consultation with us to assess your small business situation.

Disclaimer:

Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.