The realm of cryptocurrency is undoubtedly vast with activities that are undertaken to generate wealth and additional sources of income. With this comes many misunderstandings about how the prescribed guidance from the ATO and how the legislation is applied in your situation. Fullstack offers a wide array of services including cryptocurrency tax advisory and assistance in helping our clients understand the tax implications for their affairs. Here we cover the most common mistakes or misconceptions we find when working in crypto tax to help the understanding of how the law works for our clients.
Reportable Cryptocurrency Transactions
Easily the most recognized misconception regarding cryptocurrency and taxes is that we only need to declare income and pay taxes on cryptocurrency assets that have been ‘cashed’ out to fiat.
This misconception has landed a lot of our clients in a situation where we need to go back to prior years and ‘bring to account’ all the activity which has subsequently been under, or mistakenly, reported. To clarify your tax obligations when transacting with cryptocurrency, for most people who are buying and selling cryptocurrency assets, you will trigger a taxable event by doing any of the following: –
- Selling your cryptocurrency asset to fiat
- Swapping between cryptocurrencies
- Transferring ownership of your cryptocurrencies to someone else, or another entity
- Gifting your cryptocurrency assets to someone else, or another entity
- Using your cryptocurrency to pay for goods and services.
Fiat such as the Australian dollar (AUD) is simply a legal currency issued by governments.
Capital Gains Tax
Another common misconception we find is that capital gains tax is a separate assessable tax. We often hear “What is my capital gains tax liability?”, admittedly it is confusing, and it is a responsible query to raise.
The fact is capital gains tax is not a separately assessed tax. Amongst other things, capital gains tax is mainly a section of the Income Tax Act legislation which prescribes how to identify and calculate a capital gain/loss event. Therefore, if you find yourself in a similar situation, remember that if you have incurred a capital gain event you may be liable to pay income tax on the gain at your marginal income tax rate.
Being an Investor or trader is a choice
We usually get asked what the benefit between being a trader is compared to be being an investor and whether it is better treated for tax purposes as either-or. A common mistake here is that you can self-declare yourself as being an investor or trader depending on what you find beneficial from a tax perspective.
Generally, the ATO prescribes you will be a trader for tax purposes if your affairs are:
- The nature and purposes of your activity is to generate ordinary income
- High degree of repetition, volume, and regularity of your activities
- You conduct your affairs in a business-like way
- Large amount of capital invested
While some of the above have more weight to determine you as being an investor or a trader, it nevertheless highlights the fact that you will be either based on a series of facts as it relates to how you carry on your activities.
In some situations, it may be difficult to determine whether your activities undertaken are more indicative of someone who is trading or investing. Both have very different tax outcomes and emphasize the importance of seeking proper advice.
Fullstack has a full suite of advisory services, in most instances, this starts with an evaluation of your affairs to determine which status applies to your affairs and then determine the tax implications. If you find yourself in this situation reach out to your team of friendly crypto tax specialists here.
Trading crypto is simply crypto in and crypto out
Another common mistake with crypto tax that appears to affect decision-making amongst traders is that trading in cryptocurrencies is simply the sum of cryptocurrency in and cryptocurrency out, with the net amount equating to the overall profit/(loss). Unfortunately, this is not the case, in fact when your activities are classified as trading then your cryptocurrency portfolio is treated as trading stock and the trading stock provisions are applied.
The legislation requires traders to value their trading stock at the end of the financial year (30 June 20XX) as either, cost, market value or the replacement value. Replacement value is not likely to apply to the valuation of your trading stock however, you are allowed to choose which method of cost or market value to value your portfolio.
The cryptocurrency tax specialists at Fullstack Advisory have been assisting the crypto community for many years and helped to grasp a better handle on navigating the tax system. As we strive to assist the community we welcome any queries you may have concerning your understanding of how the tax laws apply in your situation.