The Australian Taxation Office estimates there are over 600,000 Australians who own Cryptocurrency. According to the ATO, last year they directly contacted around 100,000 taxpayers who had traded in Cryptocurrency and prompted 140,000 taxpayers at lodgment.
This means that if you buy, sell or invest in Cryptocurrency; you need to be aware of your tax responsibilities.
Your tax obligations will be calculated based on whether you are considered to be an investor or a trader. While investors will pay capital gains tax when they dispose of Cryptocurrency, traders pay income tax.
If a person is buying and selling their Cryptocurrencies with a quick turnover, or in what is considered an “organized, business-like manner”, they may be considered a trader and subject to income tax.
An investor is an individual who buys and holds Cryptocurrency to increase in value or capital appreciation, and most people who hold Cryptocurrency will be classed as investors.
This article takes a deeper look at how cryptocurrency tax works for investors. It is important to note that the ATO does not consider crypto a form of currency for taxation purposes.
Investing in Cryptocurrencies
Simply put, despite the name, Cryptocurrency is not taxed in the same way as cash or currency you have earning interest in a bank account.
If you’re an investor, you still have a tax obligation, but the tax office treats Cryptocurrency as an investment vehicle similar to shares and investment properties; they are classified as a capital gains tax (CGT) asset.
A Capital Gains Tax Event
CGT is applied when you dispose of your asset. While you hold the asset and it appreciates in value, you are not taxed. You’re also not taxed when you buy crypto. If you leave the coins in your digital wallet to appreciate, you won’t have a tax obligation until you dispose of the coins. Similar to holding an investment property, you are not taxed until what is called a CGT event occurs.
This is when you dispose of a cryptocurrency by:
- Selling it (for Australian dollars)
- Exchanging/trading it for another cryptocurrency
- Gifting it to someone else
- Paying for goods or services (some exceptions apply for personal use)
For example, if you purchased $100 worth of Cryptocurrency, you don’t pay tax on it unless you cash out. Your crypto may now be worth $1,000, but you are not liable for CGT until you dispose of the asset.
Capital Gains Tax Discount
A 50% CGT Discount may be applicable for an asset held for longer than 12 months. For example, suppose you held your Cryptocurrency for two years and made a $1,000 profit when you disposed of the currency. In that case, you may only be obliged to pay CGT on $500. However, suppose you held your Cryptocurrency for ten months and sold them. In that case, you may be obligated to pay CGT on the entire $1,000 profit.
Keep Records Of Your Transactions
Cryptocurrencies are typically held in what is called a digital wallet. A digital wallet can contain different types of cryptocurrencies, and it is worth noting that each Cryptocurrency is a separate CGT asset.
Each type you sell, trade or gift a form of Cryptocurrency, you may be liable for CGT, so you must ensure you keep accurate records of your transactions.
Your records should provide information on all transactions associated with acquiring, holding and disposing of Cryptocurrency. You must keep records for five years after you dispose of the Cryptocurrency.
Do I Have To Declare Cryptocurrencies?
You are obligated to declare your earnings like all assets that have made an income. Although Cryptocurrencies are a newer asset type than Shares and property, the ATO has been collecting data on cryptocurrency transactions and account information and running a data-matching operation since the 2014-15 tax year.
If you don’t declare your Cryptocurrency earnings, you may face penalties from the tax office.
This article has touched on the tax obligations if you are classified as an investor in Cryptocurrencies. Your tax responsibilities vary depending on your circumstances, and it is always best to talk to an accountant who understands Cryptocurrencies and any tax obligations.