How is Cryptocurrency taxed?
Cryptocurrency, like any investment is subject to tax. The ATO have been increasing their surveillance of crypto trading and if you dont declare your gains, there is a high chance of an ATO audit. Cryptocurrency exchanges are required to report transactions to the ATO and this data is flagged each year in ATO Pre-fill reports from which they do automatic data matching.
Cryptocurrency Buying/Selling/Swapping
Whenever you sell a cryptocurrency or exchange it for another cryptocurrency, a taxing event occurs. In most cases it will be a capital gains event and you’ll have to declare a capital gain if your investment increased or a capital loss if it decreased. Capital gains will be eligible for a 50% discount if you have held the investment for more than 12 months. A capital loss can only offset against other capital gains and can be carried forward to future years until you have sufficient gains to offset the loss.
There are some circumstances where the capital gains rules dont apply and the transaction is treated as a business profit or loss. This would be the case if you are considered to be in the business of trading but the bar to be considered a trader is pretty high. The test is subjective and requires a consideration of some of the following factors:
- the nature and purpose of the activities
- the repetition, volume and regularity of the activities
- whether you have a business plan and whether the activities are organised in a business like way
- to be carrying on a business you would usually market a business name or product
- intention to make a profit
If you have a full time job it is harder to prove you are in the business of crypto trading.
If you are in the business of crypto trading, you treat your crypto as trading stock so that all buys are treated as deductions, all sells are treated as income and each year you include your closing stock on hand as income and deduct your opening stock. The main differences with this method compared with capital gains are:
- You are not eligible for a 50% discount on assets held longer than 12 months
- You can usually deduct losses against other income (depending on whether you meet the non-commercial loss rules)
- You may include in your income unrealised gains or claim unrealised losses depending on what stock valuation method you choose
- You cannot reduce business gains on crypto trading by capital losses from other sources
Crypto Mining
Another form of Crypto activity that can be considered a business is crypto mining where you use equipment to create new cryptocurrencies. The newly created crypto is assessed as income based on its market value. The ongoing treatment of the crypto currency will then depend on whether you are in a cryptocurrency business or a cryptocurrency investor as above. If you are a business then it becomes part of your trading stock. If you are an investor, the market value becomes the cost base of the asset. When you eventually sell the crypto, any gain or loss in comparison to the cost base is assessed.
Staking
If you use your crypto to earn staking rewards, the new crypto that is generated from staking is considered as income and will be included in your assessable income.
Air Drops
Occaisonally a project will issue an air drop which provides new tokens for free. While it didnt cost you anything, you are still assessed on the market value of the asset you receive.
Personal Use Asset
There is an exemption from tax for certain cryptocurrency transations. If you acquire a crypto for the sole purpose of undertaking a personal transaction eg to buy personal goods, and in a short period of time you dispose of the crypto to complete the transaction, any gain on an acquisition under $10,000 is ignored and any loss is ignored. This is a narrow exemption and wont apply in the case of investment.
Loss or Theft
If you lose your cryptocurrency private key or your cryptocurrency is stolen, you may be able to claim a capital loss. However you need to have evidence of the original purchase as well as other evidence to prove your loss.
