- If you have bought, sold or otherwise traded or transacted in any cryptocurrency, you may be liable to pay capital gains tax.
- Everyone involved in acquiring or disposing of cryptocurrencies is required to keep records about their transactions for tax purposes.
- Understand how the ATO treats cryptocurrency, how to calculate capital gains and losses, and how to legally minimise your tax payable.
Cryptocurrency is still a new technology, and the tax implications are likely to evolve. Whether you have to pay capital gains tax or business income tax will depend on whether you are trading cryptocurrency as an investment or as a result of business activities.
Although extremely volatile, cryptocurrencies have reached high values, such as Bitcoin’s all-time high (at the time of writing) of AUD 96,000+. With over 10,000 altcoins created, it is clear that crypto is rising at a rapid pace.
To make things easier for you, we'll explain what you need to know about how cryptocurrency transactions are classified and taxed, which should give you a basic understanding of the tax principles surrounding cryptocurrencies.
However, we’re not tax experts, so if you’re unsure about your tax situation with regard to cryptocurrency you should seek the help of a tax accountant familiar with cryptocurrency rules.
Inside this guide
Capital Gains Tax (CGT) law and crypto
A Capital Gains Tax (CGT) event occurs when you dispose of any cryptocurrency, including selling or gifting cryptocurrency, trading or exchanging cryptocurrency for another crypto or FIAT currency, converting your cryptocurrency to FIAT currency (such as AUD for example) or using it to obtain goods or services.
What this means is that when you make a capital gain, by disposing of your cryptocurrency, you are required to pay tax on some or all of that gain.
If you buy cryptocurrency as an investment and sell it or exchange it at a higher price (which gives you a capital gain), you will need to pay capital gains tax at your marginal tax rate (i.e. the rate which applies to the final dollar of your income).
However, if you hold onto your cryptocurrency for more than a year before selling or trading it, you may be entitled to a 50% CGT discount. If you don’t dispose of your cryptocurrency holdings during the tax year, you will not be liable for capital gains tax even if the market value of your crypto does change.
How is crypto tax calculated?
In order to calculate CGT, you will first need to establish both the cost base and the disposal value of your cryptocurrency asset, as well as the dates on which the purchase and sale transactions occurred.
If you bought and sold your crypto asset using Australian dollars, use these amounts as your cost base and disposal value. Include in your cost base any additional costs of holding your asset, such as commission or brokerage fees, agent, accountant or legal costs, and costs of any software you have needed to manage your crypto tax affairs.
Subtract the total cost base from the disposal value in order to work out whether you have a capital loss or gain. Capital gains can be reduced by a 50% CGT discount if you have held the crypto asset for more than 12 months. Net capital losses can be carried forward, and offset against possible capital gains in future years.
A real life example
Nick bought 1 BTC for AUD 8,100 including fees in June 2019, expecting the price to increase at some point in the future. In fact Bitcoin soared in value by August 2019, and Nick was able to sell for a net price of AUD 15,800 after paying brokerage fees. His capital gain was AUD 7,700, and he declared this amount in his tax return and paid tax on it at his marginal tax rate.
However, if Nick had waited until August 2020 to sell his 1 BTC, he might have realised the same net price, but because he had held the asset for more than 12 months he would only have had to declare a gain of $3,350 after applying the 50% CGT discount.
Crypto exchanges that help you calculate your CGT
There are cryptocurrency exchanges that will help you prepare your tax reports, including:
Other exchanges may have at least some documentation available that will assist you with your tax return.
When is the gain triggered? Only when you sell? Or what if you buy and HODL (Hold On for Dear Life) crypto?
A taxable capital gain is only triggered when you sell or gift crypto, trade or exchange crypto for another crypto or FIAT currency, convert crypto to FIAT (e.g. AUD) or use it to obtain goods or services. You will pay tax on 100% of your capital gains if you held the crypto asset for less than a year, but on only 50% if you held it for 12+ months, so it may be worth HODLing your crypto for over 12 months if you’re prepared to take the price volatility risk.
If you just keep on HODLing, you won’t be liable for CGT until you sell.
Is there anything you can do to minimise CGT on crypto?
You can do things to reduce your tax liability when you deal in cryptocurrency assets. However, this will depend on whether your crypto transactions come under personal or business use jurisdiction.
When you acquire cryptocurrency assets for personal investment, for example, you may want to hold the assets for at least 12 months so you can get a CGT discount of 50%.
In the case of a capital loss, even though you may not deduct the net capital loss from your other income, you could carry it forward indefinitely to deduct against any future capital gains. If you qualify for a personal use exemption, you can avoid CGT, but the conditions where this applies are extremely limited, and in any case refer to assets acquired for less than $10,000.
What do I have to do if I make crypto losses?
If the proceeds from disposing of your crypto are less than what you paid to acquire them, you will experience what is known as a capital loss. Capital losses can be offset against capital gains made in the same financial year (on any assets, not just crypto assets), thus reducing your taxable capital gains for the year. If your capital losses exceed your capital gains, the net loss may be carried forward to offset against any capital gains you may make in future years.
You cannot offset crypto capital losses against your normal income, such as employment income, rental property income or bank interest earned.
How much trouble can you get in if you fail to comply?
The tax treatment of cryptocurrencies is constantly evolving, but currently, if you fail to declare crypto capital gains in your annual tax return you could face severe financial penalties. If it is determined that the taxpayer intentionally disregarded the law, the ATO could impose a penalty of 75% of the under-declared tax liability, plus require that you pay the correct tax itself and interest on the shortfall.
Are there services that can make tax reporting and record-keeping easy?
There are several services that can assist you when it comes to tax reporting and record-keeping, especially if you have multiple transactions and a variety of cryptocurrencies in different wallets. You may want to take a look at Crypto Tax Calculator or Koinly, and also consult a tax accountant.