If you’ve recently started trading in cryptocurrencies, then you might not have even thought about how it will affect your tax obligations.
I recently received a friendly email from the ATOM* advising that their records show I have previously disposed of cryptocurrency.
Freaked me out at first when I received the email in my inbox. Then I realised what would have triggered it.
Last year coinspot.com.au ran a Christmas promotion where if you bought a minimum of $5.00 AUD of your favourite cryptocurrency, you won some free crypto and went in the draw to win a Bitcoin. Of course every day I bought $5.00 AUD worth. While I didn't win the Bitcoin.
I did end up with a pile of tokens that I couldn't do anything with. The transaction fees or minimum transaction was greater than what I had in my Coinspot account/wallet.
- 4 Ripple (XRP) $1.20 AUD
- 104 VeChain Thor (VET) $0.83 AUD
- 6 Electroneum (ETN) $0.03 AUD
- 4 Dogecoin (DOGE) $0.01 AUD
- 5 Siacoin (SC) $0.01 AUD
- 2 Verge (XVG) $0.01 AUD
- 5 BitTorrent (BTT) $0.00 AUD
- 4 Bytecoin (BCN) $0.00 AUD
Coinspot do run a swap/exchange service and only charge 1% commission. So I decided to swap them all for some Cosmos (ATOM), which I was collecting at the time. So my $2.09 AUD of tokens got me 0.32731532 ATOM. At the time ATOM was worth $6.33 to $6.40 AUD. It also generated a taxable event and a bit of a headache for me. For sake of $2.09 I now have the choice of paying an accountant to work out my Capital Gains/Loss or I can spend many hours working it out myself. Since I am a tight arse by nature I will try and work it out myself. Hence this post is the beginning of my journey (research).
Australian Tax Office
The Australian Tax Office (ATO) advised earlier this year that they’ll be targeting cryptocurrency traders. It is therefore important to understand your tax obligations when exchanging cryptocurrency for other cryptocurrencies, fait currency or goods and services. This is also known as a taxable event.
How Cryptocurrency Is Taxed In Australia
Profit is determined in Australian dollar amounts when you exchange cryptocurrency for other cryptocurrencies, fait currency or goods and services.
If you bought 1 BTC when it’s worth $1,000 and then sell it when it’s worth $10,000. You would have a $9,000 tax obligation at the moment it was sold. Thats that taxable event again.
Two Ways That Profit/Loss Can Be Taxed
1. Investment Tax - Personal
This is when you are trading in cryptocurrency for personal gain or as a hobby.
- Casually trading cryptocurrency
- Buying cryptocurrency for personal gain
- Mining cryptocurrency as a hobby
2. Income Tax - Business
This is when crypto profits were obtained for business activities.
- Commercial cryptocurrency mining
- Professional crypto trading
- Business-related cryptocurrency transactions
Capital Gains Tax
The ATO does not view cryptocurrency as money or currency and is instead classed as an asset for Capital Gains Tax (CGT).
A CGT applies when you do one of the following:
- Sell or gift cryptocurrency
- Trade or exchange cryptocurrency for another crypto or fiat currency
- Convert your cryptocurrency to fiat currency
- Use it to obtain goods or services
You will need to pay tax if you buy cryptocurrency and later sell or exchange it at a higher price.
If you sell your cryptocurrency for less than what you paid, then you have experienced a capital loss. Those losses can be used to reduce capital gains if they occurred in the same financial year, or used as an offset against future capital gains.
There is a discount for those who hold an asset long term. If you hold an asset for over 12 months, you will only pay tax on 50% of your capital gain.
Capital Gains Exceptions
There are certain exemptions that may apply depending on how you use your crypto;
Personal Use
If you use crypto to purchase goods or services, then it would be considered a personal use asset and is not subject to CGT. That is you buy and use cryptocurrency solely to purchase goods or services like clothing or music, the cryptocurrency is usually considered to be a personal use asset, and there are no tax consequences. Cryptocurrency is not a personal use asset if it is acquired, kept or used as an investment. Generally the longer you hold your cryptocurrency, the less likely it is that it will be a personal use asset.
Donations
If you donate your cryptocurrency to a registered charity, then it’s not considered a capital gains event and you can claim the amount on your tax return.
Lost/Stolen Coins -
If your coins have been lost or stolen (for example, you have lost your cold storage wallet), you may be able to claim the value of the coins on the day they were lost or stolen as a capital loss.
Records To Keep For Tax Time
For each cryptocurrency transaction you should keep the following:
- The date of each transaction
- The value of the cryptocurrency in Australia dollars at the time of the transaction
- The purpose of the transaction
- The details of the other party involved
Examples of records you should keep:
- Receipts of cryptocurrency purchases or transfers
- Exchange records
- Records of agent, accountant and legal costs
- Digital wallet records and keys
- Software costs related to managing your tax affairs
Crypto Tax Tools
There are a number software products on the market that can assist you at tax time. You will need to import your trade and account data from the exchange. Most tax tools support importing CSV files. If you have been performing a lot of transactions it would be advisable to use one.
A couple of examples of available tax tools are:
- CoinTracking
- koinly
KYC vs No KYC For Crypto Trading
After you purchase the crypto via a KYC compliant exchange. Definitely use an exchange where KYC is not required for generating those taxable events. The exchange and taxman will only have an email to identify you and hopefully you used a make believe name when setting up the email address.
The End
I hope this has shed some light for those who have not yet thought about the taxman. You really don't want to mess with him. Best to avoid him if you can.
Stay Safe
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