The ATO doesn’t view a digital currency or cryptocurrency as money, but classes it as an asset. Therefore crypto transactions can be subject to either income or capital gains taxes in Australia. Read on below for some of the main considerations when trading in cryptocurrency, and what to include in your tax return.
Are you a cryptocurrency investor, or a trader?
Understanding whether you are an investor or a trader is important to understanding your crypto tax obligations, and whether you will need to declare it as normal income or capital gains
Despite the name, and the fact you may regularly ‘trade’ in crypto, most Australians will fall under the Investor category. If your dealings with cryptocurrency predominantly involve using it as a personal investment, and the majority of your earnings are coming from long-term gains, you will likely fall under this Investor category.
In this instance, gains and losses (selling, exchanging, or using to obtain goods or services) on cryptocurrency are subject to Capital Gains Tax, or CGT (with the 50% discount if you’ve held the asset for over 12 months).
For example – Trading one cryptocurrency to another cryptocurrency
Trading one cryptocurrency for another cryptocurrency would be considered a taxable event. In the ATO’s view this would be considered as two separate transactions. The first transaction being the sale of the first cryptocurrency and the second transaction would be buying the other cryptocurrency. Even through you don’t receive any cash in hand, you will still need to pay capital gains tax on any gain made on the disposal of the first cryptocurrency.
The ATO’s definition of a crypto trader is someone who undertakes ‘business activities for the purpose of earning income from buying and selling cryptocurrencies’. Important factors to consider as to whether or not a taxpayer is carrying on a business of trading will typically include:
- the volume and repetition of transactions
- the professionalism the taxpayer displays in carrying out the activities (planning, strategies, record keeping etc)
- the application of significant capital to the activity, and
- a discernible profit intent.
In this instance you will be taxed on your crypto income at you or your business’ marginal tax rate.
For example – Mining cryptocurrencies
If you have acquired crypto through ‘mining’ the ATO could consider you to be in the business of mining. In which case, any proceeds you receive from mining activities would be treated as assessable income. Likewise, any expenses incurred during the mining activity are allowed as deductions against any income received.
What if I’m not a cryptocurrency mining or trading business, but we accept cryptocurrency?
If you’re one of a growing number of Australian businesses that accept crypto in exchange for goods and services, this will need to be accounted for as part of your ordinary income and accounted for in its value in Australian dollars.
Similarly, when you incur business expenses and pay for these in cryptocurrency, you are entitled to deductions based on the value of the acquired items, as stipulated by the ATO.
Also, if you’re predominantly purchasing items for personal use or consumption with crypto, then it will be defined as a personal use asset and may be eligible for the personal use asset exemption.
Records to keep
The ATO has advised that anyone dealing in cryptocurrencies should keep the following records of the transactions:
- The date of any acquisitions or disposals of crypto transactions
- The value of the cryptocurrency in Australian dollars as the time of the transactions
- The identity of the other party (their crypto address)
- The nature and purpose of the transaction.
These records could be in the form of receipts of purchase, exchange records, digital wallet records or the records of your agent. Software providers like Sharesight can be super helpful in tracking all this info and storing it in one place.
If you require assistance or would like further information about taxation on cryptocurrency, contact us.