Whether you are a crypto trader or investor, you most likely have the task of now lodging a crypto tax return with your trading activity in it.
Here is a short guideline for you to help determine your tax status.
Different crypto users, different tax situations.
The boom in cryptocurrency has attracted a lot of users all over the world, acquiring cryptocurrency for different purposes. Some engage crypto for personal usage such as sending funds to family & friends across international borders.
Some hold crypto as a more anonymous store of value – essentially as ‘virtual gold’.
The majority of users who acquired cryptocurrency however has been for trading & investment purposes with the primary intent to profit. Naturally there is need to report this activity to the ATO as well.
Reporting Cryptocurrency Activity
Despite the relative anonymity of transactions on the blockchain and cryptocurrency, the ATO have set out to tax the profits and gains made by Australian crypto investors and traders.
Whether you are running a cryptocurrency mining or trading operation or simply holding crypto to profit, you should know that you are responsible in reporting the net activity in your Australian tax return.
With the prevalence of data matching & sharing between governments, not reporting your activity (particularly where the balances have been above $10,000) could lead to more attention from the government about your activity.
How is my Crypto Taxed?
The ATO has prescribed 3 different methods for calculating the taxable income from your crypto activity.
1) When is Cryptocurrency Selling Tax Free?
Acquiring or selling cryptocurrency for purely for personal use & enjoyment is effectively tax free as it does not attract CGT & is not considered trading activity.
Exemption from tax only applies in very limited circumstances and excludes investors or traders wishing to profit.
- To eligible for the Personal Use exemption, two things should be demonstrated to the ATO:
- You acquired the portfolio for less than $10,000 in total.
- The crypto was not for trading or investment purposes.
Example: Tom buys $4,000 of ETH solely to help pay off some travel expenses and transfer to an overseas relative. Instead of using Western Union and paying exorbitant fees, he used crypto for a faster and cheaper alternative. Tom does not hold any other crypto positions.
2) When Does Selling Crypto Obtain the CGT Discount?
- The CGT discount only applies to investors who engage in buy and hold strategies. To utilise the 50% CGT Discount three things should be demonstrated to the ATO:
- You held a CGT Asset (i.e. crypto)
- Your CGT Asset needs to be held for at least 12 months
- Trading cannot occur during this time, otherwise the status of trading in your business would be applied to your whole portfolio.
Example: Justine trades in all her current positions to purchase into some ICOs. Trusting in the strength of the team & business model, she intends to hold these new coins for the long term. Once these are sold 3 years in the future, Justine seeks to apply the CGT discount on the resulting gains.
3) When Does a Crypto Becomes A Trading Business?
Where transactions for crypto are done in a more frequent & commercial manner, the ATO will deem your trades as taxable business activity.
- To assess whether trading is a business activity, the ATO will consider three things:
- Frequency of trading
- Whether your trading being done in a commercial manner
- How much capital has been invested?
An example of person in the “business of trading crypto” would include a situation where 800 trades were made across 4 exchanges with over $30,000 in use.
Businesses need to report their trading income, but can also claim business expenses. There are also other special rules that apply for the business which we will cover in a future article..