Crypto-currencies aren’t for everyone because of their many complexities. And adding crypto-currency taxes to the conversation can complicate things further. But it doesn’t have to be. We’re here to help you with everything you need to know, especially when it comes to reporting your Australian crypto-currency tax to the Australian Taxation Office (ATO).
But first, let’s take a look at crypto-currencies. This landscape is very diverse and there are now over 1,600 crypto-currencies listed. However, since the phenomenon began, two have remained the most popular: Bitcoin and Ethereum. Of the two, Bitcoin is considered the more important crypto-currency – it was the first to be introduced in 2009. This is how the whole crypto movement started.
And because of its popularity, more and more merchants have joined it. Those who understand blockchain technology have also created their own crypto-currencies. The whole system became larger and eventually gained a large following. The ATO quickly developed guidelines for the taxation of crypto-currencies. And just five years later, after the launch of bitcoin, these guidelines went into effect on December 17, 2014.
How does the ATO know about your crypto-currency transactions?
Between 500,000 and one million Australians own crypto-currencies, according to the Australian Taxation Office. To determine these numbers, the ATO began collecting records in late 2019 to ensure that people, including those trading in crypto-currencies, are paying their taxes correctly. The office has been working with Australian crypto-currency service providers (CSPs) to regularly collect data related to brokerage services and payment brokers. CSPs also include crypto-currency exchanges and bitcoin ATM providers.
ATO data collection includes the following data sets:
Digital currency owner details, including name, address, date of birth, phone number, email address, date of birth and account information.
Account information, such as account status (open, lost, or locked), currently linked bank accounts, wallet address, unique identifier, and transaction date and time.
The data capture process indicates that all crypto-currency transactions you make leave an electronic record. This record is used by PSD in accordance with ATO tax guidelines.
So, when it comes time to file your tax return, the ATO will review your return and compare it to the data they have collected from the CSP. This process assures the ATO that you are being fair, especially if you disclose your crypto activity. It’s important to verify that you’re paying the right amount of tax, as the ATO will know if your tax return doesn’t match your cryptocurrency transactions.
How do taxes work for crypto-currency traders?
In early March 2020, it was reported that about 350,000 Australians received an email from the ATO. Normally, the tax authorities only go after those with large amounts of undeclared taxes. However, it seems that the ATO is focusing on every business, even the smallest ones. This highlights the fact that the ATO requires accurate tax reporting for everyone, including crypto traders and investors.
In Australia, it is worth noting that crypto-currencies are subject to two types of transactions under certain circumstances. Crypto-currency traders may have to pay capital gains tax (CGT) or ordinary income tax – or both.
Generally, you don’t have to pay income tax or GST if you’re not running a business. You simply pay for the item you purchased with crypto-currencies, like bitcoin. However, crypto-currencies are considered CGT assets, which means you have to pay this particular tax when a transaction with a crypto-currency takes place.
However, there are some cases where your transactions are exempt from CGT, including:
They use cryptocurrencies to buy goods and services for themselves. For example, you book a hotel online with bitcoins.
The transaction is less than $10,000.
On the other hand, if the transaction is over $10,000, CGT applies. This particular tax is based on the value of the cryptocurrency you used to buy and the value when you sell it.
If you hold the cryptocurrency for more than 12 months before selling it, you are eligible for a CGT rebate. These rebates include:
50% for Australian residents, including those who work as partners in partnerships.
33.33% discount if the taxpayer meets certain super funds and life insurance requirements.
This 50% discount does not apply to capital gains made by foreign residents after May 8, 2012. If the property is held for 12 months (or less), it does not qualify for a CBT allowance.
There are certain events that are considered non-CGT, such as decentralized crypto-funding (DeFi) income. These events are considered ordinary income and therefore taxed as part of the total taxable income according to the rates introduced by the ATO.
Although you may be liable to CGT, your transactions will be exempt from Goods and Services Tax from 1 July 2017.
The ATO’s position.
With many traders buying or receiving smaller cryptocurrencies when they are worth thousands of AUD, the ATO relies on data to ensure taxpayers are meeting their tax obligations. At the time of publication, 1 BTC is worth about $69,400+. But let’s say you purchased it when it was worth $10,000. You then spent it or sold it after its value increased to $20,000. You may have to pay $10,000 as part of your taxes. Gains and losses are what the ATO is looking for.
According to the ATO, it does not consider bitcoin and other cryptocurrencies to be Australian or foreign currencies. Nor are they considered money. Instead, these digital currencies are considered property in their own right. For CGT purposes, cryptocurrencies are assets, so CGT applies whenever you:
- Sell a cryptocurrency
- Send a cryptocurrency as a gift
- Exchange a cryptocurrency for another fiat currency or cryptocurrency
- Convert to a fiat currency, such as the Australian dollar.
- Buy goods and services
You can be taxed as an individual or as a business (commercial). It is important that you know your ATO classification. This is the first step in determining how you will be taxed as an individual trading cryptocurrencies.
As an individual, you are considered an investor if your primary purpose or activity is to buy and sell Bitcoin or other cryptocurrencies. You invest primarily for yourself, which means that your income will consist of capital gains, air drops, and diversions.
Most people who are in the crypto business are classified as investors. That is why they have to pay CBT.
On the other hand, you are considered a trader or entrepreneur (also known as a professional), who does more serious business. Its main purpose is to generate income by trading cryptocurrencies. If you buy and sell to make a profit, the ATO will tax you as a business. It’s quite complicated because trading is not just about frequency and volume. You can still be a trader despite having less crypto business than an individual or investor.
This classification must be done on your part if you directly or indirectly imply that you are trading for commercial purposes. The ATO will also conduct an assessment to determine if you meet this classification.
Crypto activities and their tax implications.
Buying and selling are the main actions performed by crypto traders and investors. Some transactions result in a CBT event, while others remain untaxed:
If you buy cryptocurrencies with Australian dollars or any other fiat currency, you will not have to pay any taxes.
However, it would be helpful if you still document or record the amount you paid to buy the cryptocurrency. Also, include the date and time of the purchase. This information can be used to calculate your capital gains.
Selling crypto-currencies to earn fiat currency triggers CGT. Let’s say you bought 1 BTC five years ago for about $5,000. If you now sell the BTC for $12,000 and cash it in, you’ll pay $7,000 in CGT.
Buying a crypto-currency with another crypto-currency is also a trigger for CGT. For example, you buy 1,000 ETH with 1 BTC. That BTC is from five years ago and was worth $1,000. By buying 1,000 ETH, your BTC is already worth $10,000. That means your capital gain for this transaction is $9,000.
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If youplan to move your crypto-currencies from one wallet to another, they are generally not taxable. The same rule applies to exchanges to another wallet. Relevant transactions over which you had control are not taxable.
Buying goods with crypto-currencies
If you use bitcoin or another crypto-currency to purchase goods and services, they can be exempt from your taxes. However, the amount cannot exceed $10,000. If the base price is more than $10,000, the personal use exemption does not apply. However, you will be taxed normally on any capital gains.
If you receive coins via an airdrop as part of the promotion of a crypto-currency project, you may be charged for it. You are required to count the airdrop the coins belong to as part of your regular income. The amount shown becomes the base cost of airdrops.
For example: you receive 1,000 coins from a relatively new crypto project. On that day, that crypto currency was worth $0.10 per coin. You must report $100 as part of your regular income.
What happens if the price of this crypto-currency goes up in about five months? When you sell the air coins, you report the new value as a gain. If the new price is $0.50, selling 1,000 coins represents $400 in CGT.
Also known as chain splits, you may incur fees when a blockchain splits into two (or more) parts, depending on the type of fork. In most cases, the original chain will continue to function normally. There is no basis on the new forked asset, but you will still pay CGT when you remove the new asset. There is no effect on the original asset and no effect on ordinary income.
When the original chain stops working, the new assets have a zero basis. CBT accrues when you dispose of the new one. The original chain is considered a full capital loss. No ordinary income is reported.
As an example, we have the case of the Ethereum split that occurred in July 2016. There were now two assets: ether (ETH) and ether classic (ETC). The ETC retains its rights to the original chain, which is therefore considered a perpetual asset. On the other hand, ETH is the new one created after the separation of the chain. Therefore, ETH assumes a zero basis.
Tax declaration on crypto-currencies
The most important thing to do when filing your tax return is to report all crypto-currency transactions you made between July 1 and June 30. To file your own tax return, you must have it completed by the last day of October. However, if you use an accountant or tax advisor to help you, you have until March 31 of the following year.
As usual, you will need to keep some records of your crypto activities, which should include the following information:
- Trade date
- Cryptographic value on the specified transaction date
- Purpose (personal use, gift, etc.)
- Contact information for the recipient or other party involved (this may simply be the address of the crypto wallet).
We recommend that you keep all receipts, exchange details, agent invoices and digital keys or wallet records as evidence. The reporting of crypto-currency tax is the same as regular income tax.
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