If you're currently mining crypto, it's important to learn how cryptocurrency mining is taxed. This…
Australian Crypto Tax 2021: What You need to Know
The ATO regularly updates cryptocurrency tax rules. Here’s what you need to know about Australian crypto tax in order to remain compliant.
Cryptocurrency is a novel means of storing and transferring value and allows users to send or store value in a completely decentralized manner. The highly volatile nature of cryptocurrencies has made them an attractive investment opportunity for countless Australians — but decentralized doesn’t mean tax-free. We have prepared this update for Australian crypto tax in 2021.
If you’ve purchased or sold cryptocurrency in the last financial year, it’s likely that your crypto investments may have an impact on your tax obligations and tax return. This is especially true if you’ve made a profit from selling or trading cryptocurrency — you’ll need to declare this on your tax return.
The Australian Taxation Office recently announced that it will specifically target cryptocurrency traders, so it’s highly important that crypto investors and traders understand their tax obligations.
This guide will break down the current state of Australian crypto tax and help you understand what you need to in order to meet your crypto tax obligations.
Australian Cryptocurrency Tax Basics
It’s important to keep in mind that cryptocurrency taxation and regulation is constantly evolving, The tax treatment of cryptocurrencies in Australia can change rapidly, so it’s essential to remain up to date by regularly checking the Australian Taxation Office’s guidance on cryptocurrency tax.
Understanding when and why cryptocurrency is taxable, how tax is applied, and your obligations as a cryptocurrency trader or investor are critical when preparing your Australian crypto tax return.
How is Cryptocurrency Taxed in Australia?
In simple terms, any profit made from cryptocurrency is taxed based on the AUD value of the asset when it is exchanged for fiat currency, other cryptocurrencies, or goods and services.
A cryptocurrency investor that purchases 1 Bitcoin for $10,000, for example, and then either trades the same Bitcoin for another cryptocurrency, fiat currency, spends it in return for goods and services when the value of Bitcoin rises to $20,000, it’s possible that the trader would incur a $10,000 tax obligation.
The ATO taxes cryptocurrency based on profits or losses generated on disposal. The way this tax works can differ based on specific criteria, as follows:
Cryptocurrency Taxed as Income — Business or Professional:
- Cryptocurrency profit generated through the disposal of cryptocurrency can be treated the same as personal or business income and is therefore subject to the relevant type of income tax should the cryptocurrency be obtained during the course of business activities. Some examples of these business activities include:
- Professional crypto trading
- The operation of a cryptocurrency-related business
- Commercial scale cryptocurrency mining
- Cryptocurrency transactions related to a business.
The ATO presents a variety of rules that can be used to determine whether cryptocurrency activity is business related or not. A commonly asked question is “how large must a cryptocurrency mining operation be in order to be classified as a business?”
It is important to note that Australian crypto tax in 2021 is complex because the ATO doesn’t provide definitive, precise rules regarding the scale of cryptocurrency mining operations. Instead, the ATO considers the intent behind the cryptocurrency mining operation. If the operation is conducted in a business-like manner with an expectation of commercial viability or a business plan, it’s likely that the operation will be classified as a business.
The taxation of cryptocurrency mining can raise complicated questions. For more information on crypto mining tax in Australia, see the Fullstack guide to Cryptocurrency Mining Taxes.
Any profits or losses generated in this category is typically subject to business or personal income tax.
Cryptocurrency Taxed as a Personal Investment
- Any cryptocurrency related activities that don’t fit into the categories outlined above are likely to be subject to capital gains tax, such as capital gains tax applied to personal investment gains or losses. Some examples of cryptocurrency activity that may be categorized as an investment include:
- Purchasing cryptocurrency to hold long-term
- Hobby cryptocurrency mining
- Casual cryptocurrency trading.
Any profit or loss generated by the above activities are typically subject to capital gains tax. There are, however, a number of exceptions to this rule, which are outlined in this article.
How Does the Australian Taxation Office Classify Cryptocurrency?
The ATO provides extensive guidance on the tax treatment of cryptocurrencies via the ATO website. In simple terms, the ATO dictates that Bitcoin and other cryptocurrencies that share similar characteristics are not money, nor are they foreign currency.
When considering Australian Crypto Tax in 2021 note that the ATO classifies cryptocurrencies as property and they are therefore treated as an asset for capital gains tax purposes. There are a number of actions that will result in the application of capital gains tax to cryptocurrency. These actions include:
- Selling cryptocurrency
- Giving cryptocurrency as a gift
- Spending cryptocurrency in return for goods or services
- Exchanging or trading cryptocurrency for other cryptocurrencies or fiat currency
If you make a capital gain when trading or disposing of cryptocurrency, you will likely need to pay tax on some or all of the gains. A cryptocurrency trader that purchases Bitcoin as an investment, waits for the value of Bitcoin to increase, then later exchanges the Bitcoin for fiat currency at a higher price, you’ll need to pay tax on the capital gain.
Cryptocurrency investors that hold cryptocurrency for over one year from purchase, however, may be entitled to a 50 percent capital gains discount. In most cases, this provides investors with a 50 percent capital gains discount on any cryptocurrencies purchased and held for over 12 months.
It’s important to note that a cryptocurrency investor or trader won’t make capital gain or loss until they actually dispose of their cryptocurrency, regardless of whether the market value of their investment increases or decreases.
Capital gains tax rules still apply if a trader or investor makes a loss on their cryptocurrency investment. If the proceeds generated by the disposal of cryptocurrency are less than what was initially paid to acquire it, the investor experiences a capital loss. It’s possible to use capital losses to reduce overall capital gains made in either the same financial year or future financial years. Capital losses can also be applied to investments that aren’t cryptocurrency related.
Tax Treatment of Crypto to Crypto Trades
Many crypto traders frequently make cryptocurrency trades that don’t involve AUD or fiat currency at all, exchanging various cryptocurrencies in order to capitalize on market movements or diversify investments. A crypto trader may, for example, exchange Bitcoin for Ethereum, or Ethereum for a range of different altcoins — without involving AUD in the trading process at all.
While these trades don’t involve AUD, they are still subject to capital gains tax — even though any gains a trader may have made with these trades have yet to be realised in AUD.
For Australian crypto tax in 2021 for the ATO, exchanging one cryptocurrency for another is effectively exchanging cryptocurrency for other property in lieu of money. For this reason, it’s important to keep track of the value of all trades in AUD, regardless of whether or not trades involve AUD or fiat currency.
When is Cryptocurrency Not Subject to Tax?
- There are a number of situations in which cryptocurrency won’t be taxed — in some cases, cryptocurrency users may be eligible for the personal use asset exemption. Capital gains tax is not applied to cryptocurrency transactions if:
- Cryptocurrency is used to purchase personal use goods and services, such as purchasing goods from retailers that accept cryptocurrency or booking hotel rooms
- The capital gains generated from personal use assets are less than $10,000.
Cryptocurrency is not classified as a personal use asset by the ATO if the assets acquired, kept, or used in the following ways:
- As an investment
- As part of a profit-making scheme
- During the course of business activities.
In some cases, the purpose of holding cryptocurrency may change during the ownership period, which can make determining your tax obligations complicated. A cryptocurrency holder may, for example, purchase Bitcoin or another cryptocurrency as a personal use asset in order to access cheaper products or services from specific retailers.
A rapid increase in the value of the cryptocurrency, however, could cause the original purchaser to hold on to the cryptocurrency as an investment. For Australian crypto tax in 2021, the ATO takes the amount of time cryptocurrency is held into account when assessing whether crypto is a personal use asset or not — the longer cryptocurrency is held, the less likely it is to be classified as a personal use asset.
Example: Bitcoin and personal use asset classification
A cryptocurrency user may want to purchase a product from an online retailer that provides a discount to customers that use cryptocurrency. The user may purchase a specific amount of Bitcoin in order to then buy a specific product from the online retailer and buy the item the same day the cryptocurrency used in the transaction is purchased.
In this case, the cryptocurrency used is defined as a personal use asset and is therefore not subject to capital gains tax.
Another cryptocurrency user may spend a significant amount of time investing in and storing a variety of popular cryptocurrencies. This user collects cryptocurrencies with the intent to sell them once they have increased in value. This trader also chooses to use some of the cryptocurrency they have stored in order to purchase an item from the same retailer in the example above.
While the second cryptocurrency user also uses cryptocurrency to purchase goods and services, their cryptocurrency is not classed as a personal use asset because the crypto was originally obtained as an investment. The second user’s cryptocurrency transaction is therefore subject to capital gains tax.
For more information on the difference between cryptocurrency traders versus investors, see the Fullstack Guide on Crypto Trader vs Crypto Investor status.
What Happens if my Cryptocurrency is Lost, Stolen, or Hacked?
Cryptocurrency allows users to maintain full control over their cryptocurrency — but places the responsibility for security and storage in their hands. Hacks in which cryptocurrency is stolen or cases in which the private keys to cryptocurrency wallets are lost are common in the cryptocurrency ecosystem.
If a cryptocurrency holder loses access to their private key or loses cryptocurrency due to a hack in which it is stolen, under Australian crypto tax 2021 it’s possible to claim a capital loss. There are some conditions that must be kept in mind, though — whether or not a cryptocurrency holder that has their crypto holding stolen is able to claim a capital loss depends on evidence that includes:
- Whether the cryptocurrency was stolen or lost
- Evidence that the cryptocurrency was lost or stolen
- Evidence that a private key that cannot be recovered or replaces was lost.
- If a private key or wallet can be recovered or replaced, it’s not considered lost. A lost private key, however, cannot be recovered, which makes it possible to claim a capital loss in the case that the owner is able to provide detailed evidence. This evidence can include:
- The dates on which the private key was obtained and lost
- The public wallet address associated with the private key
- The total cost involved in acquiring the cryptocurrency that was lost or stolen
- The balance of the cryptocurrency wallet at the time the cryptocurrency was lost or stolen
- Proof that the user owned the wallet, such as transactions linked to an identity
- Possession of the hardware that the wallet was stored or accessed from
- Transfers to the wallet that verify the ownership of the user, such as transfers from an ID verified cryptocurrency exchange account.
Tax Treatment of Chain Splits, Hard Forks, and Airdrops
Hard forks occur when blockchains split into two separate blockchain networks, carrying forward balance on both chains. A notable example of a blockchain fork is the Bitcoin Cash hard fork, which saw the Bitcoin blockchain split into the Bitcoin Cash blockchain and contemporary Bitcoin network.
In many cases, blockchain forks create a new wallet, with an identical 1:1 balance, which can be accessed by the original wallet owner. It’s important to identify both the new blockchain and original blockchain in order to meet your tax obligations.
The ATO treats cryptocurrency obtained through airdrops and chain splits based on whether cryptocurrency is held as an investment, or in a business.
Cryptocurrency Investments and Hard Forks
A cryptocurrency holder that owns cryptocurrency as an investment and receives new cryptocurrency due to a chain fork is not considered by the ATO to have made a capital gain or generated any regular income. Should the investor hold the new cryptocurrency as an investment, however, a capital gain is generated when the new cryptocurrency is disposed of.
Any cryptocurrency obtained due to a chain split has a zero value at the time it is obtained for the purpose of capital gains tax calculation. A user that received 100 Bitcoin Cash during the Bitcoin Cash hard fork, for example, may have sold their Bitcoin Cash in 2018 when the value of Bitcoin Cash reached $1,000. In this case, the total capital gain of the Bitcoin cash holder would be $100,000.
Any new cryptocurrency gained from a hard fork for more than 12 months is likely to be eligible for a capital gains tax discount.
Cryptocurrency Held by a Business and Hard Forks
Australian crypto tax in 2021 covers chain splits and hard forks. The ATO dictates that any new cryptocurrency received due to a chain split or hard fork is treated as trading stock. The new cryptocurrency generated by the fork is either held for sale or exchange during the course of ordinary business activities and therefore must be brought to account at the conclusion of the income year.
Tax Obligations for Cryptocurrency Traders
Professional traders typically carry out multiple trades weekly, sometimes performing multiple trades in a single day. These traders buy and sell cryptocurrency on a regular basis for profit and are treated differently from a tax perspective when compared to intermittent or occasional investors.
The profits generated by a professional cryptocurrency trader are treated as part of their assessable income, which makes it possible to claim deductions on trading expenses.
Determining whether your trading activities classify you as a trader or investor can be a difficult process. In general terms, a cryptocurrency holder that purchases cryptocurrency with the intent of generating long-term profit is an investor, while a cryptocurrency holder who buys and sells over short-term periods with the intent of generating short-term profit is likely to be classified as a professional trader.
If you’re not sure how to classify your crypto activities, it’s best to reach out to a professional crypto tax consultant for guidance.
How to Determine Whether You are a Cryptocurrency Investor or Trader
The distinction between a shareholder and trader can have a significant impact on your Australian crypto tax 2021 obligations. The ATO provides detailed guidance on the distinction between the two via the ATO website.
Shareholders are individuals that own shares with the intent of earning income from dividends. A share trader is an individual that carries out business activities in order to generate income from buying and selling shares. The same distinction between shareholders and share traders can be applied to cryptocurrency holders and cryptocurrency traders.
- It’s possible to determine which category you fall into by assessing the following factors:
- What is the nature of your activity? Are you attempting to generate profit?
- What is the repetition, volume, and regularity of your trades? How often, and how much do you trade?
- Is your activity organized in a businesslike manner, with a business plan, premises, accounts, or records of trading stock?
- What is the amount of capital you have invested?
For detailed guidance on trading cryptocurrency as a business, see the Fullstack guide to Crypto Trading as a Business 101.
Cryptocurrency Businesses and Tax
There are a number of cryptocurrency-specialized businesses, such as digital currency exchanges or cryptocurrency mining operations. If you run a cryptocurrency-specialized business, it’s important to pay close attention to your tax obligations.
Holding cryptocurrency for exchange or sale as part of your ordinary business operations, for example, means that trading stock rules apply to the cryptocurrency you hold. Any proceeds generated by the sale of cryptocurrency as trading stock in a business is classified as ordinary income. It’s possible to claim the cost of acquiring cryptocurrency held as trading stock in a business as a deduction.
- In order for businesses to take advantage of trading stock rules, however, it’s necessary to satisfy the requirements outlined by the ATO in order to be classified as a business. These requirements include:
- Operating your business in a commercially viable manner, for commercial reasons
- Operating in a business-like manner, such as creating and following plans or purchasing capital assets and inventory in accordance with a business plan
- Operating with intent to generate a profit
- Preparing accounting records
- Demonstrating regulatory, consistency, and repetition in your business activities.
Determining whether your activities satisfy the ATO requirements for business classification can be a complex process. If you’re not sure whether your operation is classified as a business for tax purposes, it’s best to reach out to a professional cryptocurrency tax specialist.
Cryptocurrency Business Transactions and Tax
Accepting cryptocurrency at your business creates unique record keeping obligations that businesses must adhere to. When accepting cryptocurrency for goods and services, your business must record the value of the cryptocurrency received in AUD as part of your ordinary income.
Should your business purchase items, such as stock, or pay for services with cryptocurrency, you may be eligible to claim a deduction based on the value of the item or service purchased.
- There are a number of special rules applied to businesses that may choose to pay employees with cryptocurrency. These rules include:
- Any employee/employer relationship that involves a salary sacrifice agreement in relation to crypto must class the cryptocurrency as a fringe benefit. In this case, the employer is subject to the Fringe Benefits Tax Assessment Act 1986
- If a business does not have a salary sacrifice agreement, the employee is considered to have chosen to derive their salary or wages. In this case, businesses must meet pay-as-you-go tax obligations on the AUD value of the cryptocurrency paid to the employee.
Accepting cryptocurrency at your business or using cryptocurrency for business transactions can be complicated. For more detailed information, take a look at Fullstack’s guide to Businesses Accepting Crypto — Tax Implications.
Cryptocurrency Tax Record Keeping
- Record keeping is critical to both individuals and businesses for cryptocurrency tax reporting. It’s essential that both businesses and individuals keep detailed records of all cryptocurrency transactions. These details should include:
- The date of each cryptocurrency transaction
- The purpose of each cryptocurrency transaction
- The value of each cryptocurrency transaction at the time the transaction was made
- The details of any other party involved in the cryptocurrency transaction, which can consist of a simple wallet address.
- An individual seeking to take advantage of the personal use exemption for cryptocurrency, for example, should be able to prove that they used their cryptocurrency in order to purchase goods or services for personal use. Other details that should be recorded include:
- Records from exchanges used to obtain or trade cryptocurrency
- Transaction receipts of all cryptocurrency purchases or transfers
- Digital wallet records and keys — note that private keys should not be provided to any party but the owner of the wallet
- Any software costs associated with the management of tax obligations
- Any agent, legal, or accountant costs.
How to Create an Effective Australian Crypto Tax 2021 Strategy
- There are a number of simple strategies you can adopt in order to streamline your cryptocurrency tax administration and ensure that you are compliant with all ATO cryptocurrency tax requirements. These strategies include:
- Hold cryptocurrencies purchased for investment for over 12 months in order to take advantage of the 50 percent capital gains tax discount
- Carefully plan out your cryptocurrency purchases in order to ensure you are fully aware of any potential tax consequences
- Keep highly accurate records of cryptocurrency transactions as they are made Keeping track of crypto transactions as they occur is more efficient than sorting backdated transactions
- Consider any potential deductions you may be able to claim
- Always ensure you have disclosed all available information regarding your cryptocurrency activities to the ATO.
Cryptocurrency tax may seem complex. Following an effective cryptocurrency tax strategy and ensuring that you are accurately recording and disclosing all relevant information, however, can streamline your reporting process and assist in minimizing your overall cryptocurrency tax obligations.
An effective Australian crypto tax 2021 tax strategy can save you time and money at tax time. If you’re not sure of your cryptocurrency obligations, reach out to Fullstack for comprehensive guidance today.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, agencies and entrepreneurs.