Cryptocurrencies have become a hot topic over the last decade or so, dominating the blockchain scene even as non-fungible tokens (NFTs) burst onto the stage with much controversy and aplomb.
Data from Gemini's Global State of Crypto report 2021 found that some 43% of Australian crypto holders first invested in cryptocurrencies in 2021, with 81% of those investors choosing to hold their assets for the long term.
With so many new crypto investors on the bandwagon, it's likely many will be searching for answers about how their cryptocurrencies are regulated come tax time.
Proactive has collaborated with CryptoTaxCalculator co-founder Shane Brunette to answer your burning Crypto-tax queries.
In this article:
- How does the ATO regulate crypto tax?
- What hidden pitfalls should you avoid?
- How can you make the most of your crypto come tax time?
How does the ATO regulate crypto tax?
The Australian Tax Office does not regulate crypto as another type of currency, despite the confusing name. Rather, crypto is considered a digital asset, as it’s not issued by any government and isn’t subject to the same regulations and oversight.
Crypto is considered an “exotic instrument” with the ATO, explains CryptoTaxCalculator co-founder Shane Brunette.
“The tax rules around cryptocurrency are more complex than standard securities,” Brunette said.
“Taxes can occur under the capital gains regime as ordinary income, through revenue account, and GST might apply to certain transactions.”
In most cases, crypto investments are treated much like securities, with any capital gains subject to a personal income tax like any ‘normal’ asset.
The rules around crypto tax change when used as ordinary income but in most cases, the sale of crypto is treated as the disposal of a capital asset.
“In most instances, it is unlikely that personal use asset rules would apply because most cryptocurrency is used to make a profit,” Brunette explains.
“If you were to meet the personal use asset rules then you would not need to consider gains or losses. You should always talk to your tax professional before claiming this.”
The ATO imposes a capital gains tax (CGT) when you ‘dispose’ of your cryptocurrency, or when you:
- Sell or gift cryptocurrency;
- Trade or exchange cryptocurrency (including the disposal of one cryptocurrency for another cryptocurrency);
- Convert cryptocurrency to fiat currency (a currency established by government regulation or law), such as Australian dollars; or
- Use cryptocurrency to obtain goods or services.
What hidden pitfalls should you avoid?
Crypto is a new and untested frontier that many governments and banking regulators are still scrambling to catch up with, so it's unsurprising many investors are feeling unsure.
Often fees on exchanges are paid with cryptocurrency, including buying and exchanging crypto and NFTs. Fees, conversions and exchanges are all considered a 'disposal' by ATO standards and come with the requisite tax implications.
“Complex transactions such as bridging or wrapping tokens (different ways to exchange coin for coin) might change the underlying digital rights, and lead to a disposal of the original asset for tax purposes,” Brunette explains.
“You might receive cryptocurrency that is considered income for tax purposes, such as through airdrops or staking rewards.”
For those less versed in the intricacies of the blockchain, airdrops are in essence free 'samples' of crypto coins, often given away in promotions for new coins.
Staking is a more complex process involving ‘pledging’ small amounts of coins to validate new blockchain blocks. Want to know more? We’ve got you covered.
“The most common problem that we see is users making a lot of cryptocurrency transactions (and thus generating a large percentage of CGT) before understanding the tax consequences,” Brunette continued.
“This can lead to unfavourable transactions from a tax perspective.”
To work out your capital gains or losses, he recommends using software that identifies, tracks and organises your personal digital portfolio across exchanges and blockchains.
How can you make the most of your crypto come tax time?
Crypto is complicated and the transactions possible with it are more so. The bottom line to reducing your tax loss is simple; hold long enough.
“To maximise long-term gains you would want to hold your cryptocurrency for longer than 12 months as an investor,” Brunette explains.
Like other securities, crypto is subject to a capital gains discount of 50% if it’s held for longer than 12 months.
Due to the complexity of blockchain assets, Brunette once again suggests using a purpose-built software that can consolidate all digital transactions across multiple wallets, to calculate capital gains and losses of the previous year, and what your tax on each trade may be.
“Consider implementing these tools at your next consultation to maximise your tax return, avoid penalties, reduce stress and receive tailored crypto advice,” he said.
Brunette’s personal recommendations are his own CryptoTaxCalculator, which supports ATO requirements, or working with a tax professional such as H&R Block (NYSE:HRB) to ensure your tax returns are completed correctly.
Crypto is extremely volatile, but losses can be strategic. While a loss in one year won’t discount a gain in the next, you can offset capital gains from securities with capital losses from crypto and earn yourself a discount on your tax bill without too hard a hit to your broader portfolio.
There are many myths and misconceptions around crypto and tax, so if you take anything away from this article, let it be this: if you’re doing anything more complicated than directly buying and selling crypto, talk to a professional before you land yourself with a huge, unexpected tax bill!
About Shane Brunette
A software engineer by trade, Shane Brunette created CryptoTaxCalculator after experiencing the pain of doing his taxes during the 2017 crypto boom. He holds a Master in Artificial Intelligence, as well as a double degree in Psychology and Economics.
About CryptoTaxCalculator
CryptoTaxCalculator makes understanding tax obligations simple and straightforward. Its signature tools help to identify, track and organise personal crypto activity across hundreds of exchanges and blockchains, with both ease and accuracy.
CryptoTaxCalculator generates reports with added transparency, saving time and stress. It is helping investors, traders and accountants by providing clear and secure records of crypto activity, so you can relax at tax time.
CryptoTaxCalculator was co-founded by brothers Shane and Tim Brunette in 2018 and is headquartered in Sydney, Australia. For more information visit cryptotaxcalculator.io