Crypto Tax; All you need to know
The latest Roy Morgan research into Australians’ investments indicates that 5%, or more than 1 million Australians aged 18 and over, now own at least one cryptocurrency. Last month Australian crypto market has seen a huge amount of selloff. According to reports, the overall market value of all cryptocurrencies is now less than $1.43 billion, or around a third of what it was in November. So, in just over half a year, crypto value has lost almost $2.86 billion. You must be aware of your tax obligations if you buy, sell, or invest in cryptocurrencies. However, a positive element of the crypto tax in Australia is that the ATO (Australia Taxation Office) recognizes losses. This article describes the tax obligations and the procedures to follow in your tax return.
What is cryptocurrency in simple words?
Cryptocurrency is a digital asset that is decentralized and built on block chain technology. A blockchain is a distributed, open ledger that stores transactions as code. Commonly cryptocurrencies are created through a process known as mining. Mining is a time-consuming process in which computers solve complicated problems (puzzles) in order to verify the authenticity of transactions on the network. The owners of those computers may earn newly mined cryptocurrency as a reward.
What are the common types of cryptocurrencies?
How Crypto is taxed in Australia?
Cryptocurrency earnings are taxed in a different way compared to general earnings on investments like interest on the bank account balance. As an example, if you acquire $200 worth of crypto and it increased in value to $500, you have not required to pay taxes until you cash out that amount. A capital gains tax (CGT) event occurs when you dispose of your cryptocurrency. The disposal can occur when you:
- Cash out cryptocurrency to normal currency such as Australian dollars
- Trade or exchange cryptocurrency for another
- Gift cryptocurrency
- Use cryptocurrency to obtain goods or services that aren’t for personal use.
If you withdraw your cryptocurrency and deposit it into a regular bank account, you must pay capital gains tax (CGT) on the profit. Any capital gain you make through that transaction will be added to your taxable income and taxed at your individual income tax rate. Click here to find out more about individual tax returns.
When you exchange one cryptocurrency for another, you must also pay tax because you are disposing of one CGT asset and acquiring another. The market value of the cryptocurrency you receive at the time of transaction must be calculated in Australian dollars.
Staking rewards and airdrops
Staking is a type mechanism’ in which investors must hold cryptocurrency units to validate transactions and create new blocks. The investor who was chosen to hold the units was rewarded with additional tokens. The amount earned through additional tokens will be added as a taxable income in your tax return for the particular financial year (irrespective of whether you sold it or not). Later, if you sold the additional tokens, the profit earned through that transection becomes capital gain and added to your income.
Airdropped tokens are essentially free cryptocurrencies given to existing token holders as a way of increasing the supply of tokens. The same taxation principles used for staking will be applied for airdropped crypto.
What are the possible tax deductions related to cryptocurrencies?
Losses on capital
If you have a net capital loss, you can use it to offset a future capital gain. A net capital loss cannot be deducted from other income. You also need to consider all the expenses like debit card fees or wallet exchange commissions related to crypto transactions.
Cryptocurrency investment for more than a year
The ATO offers a 50% discount on your crypto capital gains liability when you hold your digital tokens for more than 12 months. This is something you should seriously consider – even if you believe crypto is worth selling at the moment. After 12 months, even if you sell at a lower price, you may end up making more money with the fifty percent deduction.
Crypto as a personal use assets
Cryptocurrency is a personal use asset if it is acquired and used within a short period of time to acquire items for personal use or consumption; if you buy crypto to buy a product or service for personal use, it may be exempt from taxes.
In most cases, cryptocurrency is not a personal use asset and is therefore subject to capital gains taxes. Only personal use assets purchased for less than $10,000 are exempt from capital gains tax.
Keeping track of cryptocurrency transactions
It is crucial to keep detailed records for all cryptocurrency transactions, whether you are using cryptocurrency for investment, personal use, or business.
In relation to your cryptocurrency transactions, you must keep the following records:
- the transaction date
- the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be obtained from a reputable online exchange)
- the purpose of the transaction and who the other party was (even if it was just their cryptocurrency address)
You should keep the following records:
- receipts for cryptocurrency purchases or transfers
- exchange records
- records of agent, accountant, and legal costs.
- digital wallet keys and records
Keeping good records will help you calculate and meet your tax obligations, You can use an accountant or third-party software to assist you in meeting your record-keeping obligations and calculating your taxes.
What happens if you don’t declare it in your tax return?
If you do not declare your cryptocurrency profits in your tax return, you may face consequences. Since the 2014-15 tax year, the ATO has been collecting data on cryptocurrency transactions and account information from designated service providers, and its data-matching operation is still ongoing this year.
What about NFTs?
An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency. If you have bought into the hype around the non-fungible tokens, those too are considered investments, and any profits are treated the same way as cryptocurrency profits.
You can always contact TASC to help you with all the tax solutions
