Introduction
Cryptocurrency has recently emerged as a popular investment option, with millions investing in digital assets such as Bitcoin, Ethereum, and Litecoin. While these crypto assets offer the potential for high returns, they also come with their own challenges, especially regarding taxation.
The Australian Taxation Office (ATO) has issued guidance on how crypto assets are treated for tax purposes. However, navigating through these guidelines can be complex and confusing for investors. This article will explore the tax implications of owning and trading crypto assets and provide insights on how to report them in your tax return.
Key takeaways
- Investing in cryptocurrency triggers a capital gains tax (CGT) event when sold, exchanged, or swapped.
- Cryptocurrency used primarily for personal transactions may be exempt from CGT if acquired for less than $10,000.
- A 50% discount on capital gains tax is available for crypto assets held for more than 12 months by individuals or trusts.
- Consulting with registered tax agents like ZedPlus can help you manage cryptocurrency taxes effectively.
What are crypto assets?
Crypto assets or cryptocurrency are a digital representation of value that enables electronic transactions, storage, and trading, including unique assets like non-fungible tokens (NFTs). These assets generally work without the oversight of the central bank, regulatory body, or government entity.
As a specialised form of digital assets, they leverage cryptographic methods for data security and utilise distributed ledger technology, such as blockchains, for recording transactions. These assets operate on dedicated blockchains or are built on established platforms like Ethereum, which serves as a digital ledger to track crypto transactions securely.
How does tax work on cryptocurrency?
When you invest in cryptocurrency, it's considered a capital gains tax (CGT) asset. This means you trigger a CGT event whenever you sell, exchange, or swap your crypto asset. At this point, you need to calculate whether you've experienced a capital gain or loss.
The significance of distinguishing between a capital gain and loss lies in its impact on the amount of capital gains tax you're obliged to pay. A capital gain increases your tax liability, while a capital loss can offset any capital gains, potentially reducing your overall tax.
Here's how to do the calculation: Take the sale price of the cryptocurrency in Australian Dollars (AUD) and subtract the cost base, which is how much you initially paid for it in AUD, including any transaction fees. This difference can either be a capital gain if the sale price is higher than the cost base or a capital loss if it's lower.
If you're making multiple sales, you can combine all your gains and losses to determine your net capital gain or loss for that year. This net amount is then added to your total taxable income for the year, and your tax is calculated based on your marginal tax rate in that specific year.
One most important point to consider is that if you're an individual or a trust and you've held the asset for over 12 months, you qualify for a 50% discount on your capital gains tax.
Let’s understand the concept better with an example below:
Example:
Let's say you bought 1 Bitcoin for AUD 10,000, including fees, and sold it later for AUD 15,000.
- Cost Base (Purchase Price + Fees): AUD 10,00
- Sale Price: AUD 15,000
- Capital Gain: Sale Price - Cost Base = AUD 15,000 - AUD 10,000 = AUD 5,000
If this was your only transaction for the year, and you held the Bitcoin for over 12 months, you're eligible for the 50% discount on the capital gains tax. You would only include AUD 2,500 (50% of AUD 5,000) as your taxable capital gain.
This AUD 2,500 would be added to your regular income for the year, and the tax would be based on your overall income, including this gain. If you had other sales, you would combine those gains or losses with this one to calculate your total net capital gain or loss.
What are your reporting obligations for crypto transactions?
Reporting cryptocurrency transactions to tax authorities is an essential responsibility for taxpayers. Individuals must include their crypto transactions in various countries, including Australia, in their annual income tax returns. The Australian Taxation Office (ATO) has designated sections for crypto-related reporting.
When documenting your crypto transactions, it's essential to provide the following information:
- Capital gains and losses: You must declare any capital gains or losses incurred from cryptocurrency transactions within the tax year.
- Personal use assets: For cryptocurrencies used in personal transactions under a specific threshold (for instance, AUD 10,000 in Australia), you must assess whether these qualify as personal use assets and report them accordingly.
- Business activities: If you participate in cryptocurrency trading, mining, or conducting any related business activities, you should declare the income generated from these activities as a part of your business income.
When is a crypto asset considered a personal use asset, and what are its tax obligations?
A crypto asset, such as Bitcoin, is considered a personal use asset if it is kept or used mainly for personal use, for example, to buy items for personal use or consumption. The determination of whether a crypto asset is a personal use asset is made at the time of its disposal. Factors include:
- Short-term use: If you acquire and use the crypto asset quickly to buy personal items, it will likely be a personal use asset.
- Long-term holding: If you acquire and hold a crypto asset for some time before using it or only use a small proportion for personal consumption, it is less likely to be considered a personal use asset.
Tax implications of personal use crypto asset
- Capital gains tax exemption: A capital gain on the disposal of a crypto asset is exempt from CGT if the asset is a personal use asset acquired for less than $10,000.
- Capital losses: All capital losses made on personal use assets, including crypto assets, are disregarded for CGT purposes. This means you cannot use these losses to offset capital gains, nor can they be carried forward to future income years.
What are the records you need to maintain for your cryptocurrency transactions?
Here are the records you should meticulously maintain for each of your crypto assets for 5 years:
- Receipts of purchase, transfer, or disposal: Keep all receipts when you buy, transfer, or dispose of crypto assets. These documents are crucial for calculating capital gains or losses.
- Transaction dates: Record the date of each transaction. This information helps to determine holding periods and eligibility for specific tax treatments, like the CGT discount for assets held for more than 12 months.
- Transaction details and parties: Maintain a detailed description of what each transaction is for and who the other party is, even if it's just their cryptocurrency address. This clarity is vital for distinguishing the nature of each transaction.
- Exchange records: To support your transactions, keep detailed records from the exchange platform, including trades and valuations.
- Value in Australian dollars: For each transaction, record the crypto asset's value in Australian dollars at the time of the transaction. This value is critical for calculating your capital gain or loss.
- Associated costs: Keep records of agent, accountant, and legal costs. These expenses can be included in the asset's cost base or reduced from the capital gain. Digital wallet records and keys: Maintain records of your digital wallet and the keys. While not directly related to tax calculations, they are crucial for accessing and proving ownership of your crypto assets.
- Software costs: If you have incurred costs on software that helps manage your tax affairs, keep a record of these expenses as they may be deductible.
How can ZedPlus help?
If figuring out cryptocurrency taxes seems tough, don’t worry—the team at ZedPlus knows how to manage them, and we’re here to help.
Whether you’re dealing with crypto as an individual or a business, the key step is to keep all documentation related to your crypto transactions. This way, we can review your activities and determine any taxes you need to pay or might get back.
We’re here to guide you through your cryptocurrency tax filing and calculate any taxes you owe. We'll also look for ways to lower your tax bill on crypto investments, like using the 50% tax cut you can get for holding your cryptocurrency for longer than a year.
Book a time to chat with one of our experts today. We’ll make the process straightforward so you can focus on enjoying your investment without stress.
Ending note
The ATO has adopted a flexible approach in handling the taxation of crypto assets. Yet, with the rise of cryptocurrency as a popular investment among mainstream investors and the increase in available data, the ATO is enhancing its oversight to ensure adherence to tax laws. It’s imperative for investors to report their crypto transactions accurately and keep comprehensive records.
Grasping the tax requirements, particularly for personal use assets, is key to correctly filing your taxes and possibly lowering your tax obligation. Through diligent record-keeping and reporting, managing your crypto taxes during tax season can be seamless.
For individuals looking for extra support and aiming to stay aligned with the current regulations, reaching out to ZedPlus for specialised advice can offer reassurance and simplify your tax handling process