A cryptocurrency is an encrypted digital asset that can be used to make transactions on the blockchain. It is decentralised, meaning that it operates independently of a central bank or government. The term “cryptocurrency” may be used to refer to Bitcoin, Ethereum, or any other digital currency, or coin, having the same characteristics.

If you’ve bought, sold, traded, mined, staked, given, and/or received a cryptocurrency over the past financial year, you will probably need to report it in your taxes. This transaction may have occurred in Australia or any other nation, however, if it took place overseas, there may also be a tax consequence on the foreign country.

Accordingly, figuring out your tax implications may be a little difficult. But with the ATO putting the spotlight on Australian crypto investors, it’s incredibly important to know exactly what you’re doing, and how to report your tax obligations properly.

So how is Cryptocurrency Taxed in Australia?

The ATO considers cryptocurrencies a capital asset, as such they only qualify for a capital gains tax if they are disposed of by:

  • Selling or gifting them
  • Trading or exchanging them
  • Converting them to fiat currency
  • Using them to obtain a good or service

If you make a profit, or capital gain, from the disposal, some or all of the gain may be taxed. This tax may vary depending on whether you are taxed as an individual or a business. If you are operating in the capacity of a sole trader business, the profit will be considered ordinary income and not a capital gain.

As a Business:crypto tax

To be considered a trader by the ATO, you need to be operating in a “business-like manner”. This means you should have:

  • Invested a significant amount of capital
  • Be operating on a short-term profit generation plan
  • Repetitive transactions that take place on a regular basis – preferably of a high volume
  • Business registration, strategy documents, office space, budgeting, bookkeeping…

If you are still unsure whether you qualify as a cryptocurrency trader, it is recommended that you have a conversation with our crypto-tax specialist to help you figure it out.

Being a trader allows you to function in the capacity of a small business. This means that you may have access to small business tax benefits such as small business tax incentives and offsets and work expense deductions, to name a couple.

However, as a trader, you are bound to face more scrutiny from the ATO. This means that you will need to be very strict in your administrative bookkeeping and following compliance requirements so you can hold-up in the face of any audits.

Choosing to pay your employees’ wage in cryptocurrency is treated exactly as a normal wage or salary. Accordingly, you will have to meet all PAYG and super guarantee obligations as per the Australian dollar value of the cryptocurrency you are using to pay them.

Finally, there are many rules and regulations governing how loans, DeFi, interest, staking, and all other forms of crypto-income are taxed, but the general rule of thumb is that any income or expense rendered in cryptocurrency will need to be reported in its equivalent Australian dollar at the time it occurs. This also includes trades made with futures, options, CFDs, and any other derivatives.

If you’re still unsure about whether you qualify as a trader and how this affects your taxes, talk to our cryptocurrency tax specialist for more details.

As an Individual:

 The ATO considers the majority of crypto traders as individual investors. An investor is someone buying and selling cryptocurrencies as a personal investment. In such a case, your cryptocurrency transactions are taxed as capital gains or losses – depending on the profit or loss generated from their disposal.

As a capital gain, they qualify for the long-term holding clause, meaning that if you hold them for more than 12 months, only 50% of the generated gain is taxed. Additionally, capital losses can also be carried forward and used to offset any capital gains made in a later year.

However, it is very important to keep records of each cryptocurrency transaction made. This includes, but is not limited to:

  • The date each transaction is made
  • The value of the cryptocurrency in Australian dollars at the time of the transaction
  • The purpose of the transaction
  • The details of the other party involved
  • Any receipts of purchases, transfers, or exchanges
  • Invoices for any agent, accountant, or legal adviser
  • Any software costs associated with the management of your taxes

Accordingly, after the end of the financial year, you have until the 31st of October, if you are lodging alone, to report your cryptocurrency transactions and claim any deductions. It is important to note that just as with a business, there are different rules and regulations that affect how your transactions are taxed. This includes anything to do with gifts, forks, airdrops, staking, mining, and using crypto as loan collateral.

One way to avoid the heavy capital gains tax is to make your cryptocurrency investments via an SMSF. This may be a little hard to manage as you will need a separate wallet with proof that any transactions made using that particular IP are only for your fund and not for any personal asset. This means that you will need to isolate any trading history for that particular wallet and ensure that it matches all transactions from the fund’s bank account. You may also need to have a deed of trust or some similar document confirming that the fund is the only owner of the cryptocurrency.

Finally, as with any other investment, you will need to pass the sole purpose test to be able to invest in any cryptocurrency.

If you’d like to learn more about how investments affect your income tax, how you can use your super to minimise your tax, and how to make the most out of your cryptocurrency investments, contact our financial advisors now.

If you’re still unsure about your cryptocurrency tax obligations, reach out for a holistic tax planning strategy that will incorporate your personalised financial situation to minimise your taxes and empower you to put it into action.

Disclaimer: Information included in this post is of general nature, it has been prepared without taking into account your specific situation. It is not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice. You should not make any decision, financial or otherwise, based on any of the information presented here without undertaking independent due diligence and consultation with a professional accountant or financial adviser.