Financial Spectrum’s Brenton Tong authored this article for Canstar. You can view the original article here.
What a difference a few months make! I last wrote about cryptocurrency tax in 2021 when the market was booming. It was all about holding on and cashing out profits. For those that purchased most major currencies many years ago, you’re likely still sitting on a healthy profit. But what happens if you purchased at the top and you’re now sitting on a loss? How does tax work when things are going backwards? We usually focus on what tax you have to pay and what deductions you can claim. While this is addressed here, I’m also introducing the concept of losses – which sadly for many, is what they’re now sitting on.
The Government is watching
The Australian Taxation Office (ATO) along with AUSTRAC keep a watchful eye on many of the financial transactions across the country. If they’re not watching, it’s often the case that you’re then dealing with a reporting entity. Banks, insurance and investment companies all supply data to the ATO. However, did you know that your crypto exchange also shares data with the ATO? Did you know that Uber does, as well as Airbnb? Keep in mind that if you think of it now, chances are the ATO thought about it last week. It’s a prudent and sensible approach to assume that the ATO knows about your BTC sale the other week, or just those few ETH that you offloaded while buying XRP. Just rented your car out on Car Next Door for a few hundred? Yup, the ATO knows about that too.
All quality cryptocurrency exchanges in Australia are registered with AUSTRAC. While you may not like the fact that they’re reporting your transaction data to the ATO, you should enjoy the fact that they are regulated and that Australia regulations have keep money and the banking system pretty safe for a long time. Cryptocurrency isn’t anonymous (at least not in Australia), so you need to keep proper records and report your profits each year for the Australian Government to take their slice of your profit.
Tax principles for cryptocurrency investors
Cryptocurrency investors can be classified in two different classes. Investors and traders. Most of the time, you’ll clearly fit into one of the two categories – however there is some grey space in the middle where some could be either.
Most Cryptocurrency holders will be investors. Even if you buy and sell a lot, there is a strong chance that you’re still an investor. Essentially, investors hold their assets hoping for a return – even if they’re holding it for a short period of time. Similarly to property and shares, you would be buying your cryptocurrency to hold until the price is right and then sell. You’ll likely hold onto some of your investment for a longer period of time as well. With the cost of electricity climbing, and the price per coin falling, mining is less popular than it was just 12 months ago, however investors calculate their cost of mining differently compared to traders too.
- Profit is as simple as subtracting your total purchase price from what you sell your coin for, minus any selling costs. Purchase costs would be what you paid for the coin plus fees, sale cost would the selling price minus any costs.
- In the event that you mined the coin, your purchase price is nil. You may have purchase costs such as the depreciation of your mining rid, power etc – but that’s not an income expense, it’s a cost of purchase
- If you make a profit within 12 months of purchasing your coin, you pay tax on 100% of the profit. If you hold your coin for more than 12 months, you’re eligible for the CGT 50% discount and only pay tax on half
- If you sell at a loss, you can use this loss to offset any other gains you’ve made either in the same financial year, or you can store that loss for gains you might make in the future
- You can’t use that loss to reduce your personal taxable income
- You can’t use that loss to reduce previous years gains
- If you’re tempted to sell a coin to solidify a loss, you’re not allowed to buy it back straight away as the ATO will claim this isn’t a bona fide transaction and was done just to pay less tax and you’ll still need to pay tax on your profits.
- If you sell coins that are at a loss and don’t buy back in, you will be able to claim those losses against this years gains
Tax principles for cryptocurrency traders
If you’re holding cryptocurrency as a business, you may be considered to be a trader. Traders run a business – and they may be trading anything from fruit and veg, to sports shoes or cryptocurrency. Just doing lots of transactions does not make you a trader – you have to show that you’re doing it to generate income as a business. While many are tempted to consider themselves traders, there are some downsides that you need to consider. The temptation of the quick and early deduction isn’t always worth it, so thinking long and hard if you want to go down this path.
- Profit is very similar to investors in that it’s your purchase price and costs taken away from the sale price and costs. However, traders can also claim a broader range of deductions such as
- Professional fees relating to your trading
- Overheads such as power and other utilities, rent and office supplies
- When you mine for your coins, they are treated as income as soon as they hit your wallet. While you can depreciate your mining equipment and claim all the costs as deductible, your coins are taxable straight away
- If you make a loss on your mining, you can claim it against your other cryptocurrency trading
- Your exchange fees are instantly tax deductible rather than forming part of your purchase costs
- You don’t get the benefit of the 50% CGT discount on any coins you own for more than 12 months
Set up and longer term considerations for both traders and investors
Planning out what and how to invest or trade is imperative – however many people have jumped into the cryptocurrency market on a whim without much forethought on the longer term implications of their decisions. As there are tax considerations when investing, you should give some thought to:
- Who’s name should you invest in
- Should you be investing into your own name or:
- a company
- a trust
- a Self Managed Super Fund
- Should you use your own savings, or should you borrow to invest?
- If you’re buying for a child, have you considered the tax penalties the ATO imposes on minors?
The long term tax difference between the various options can result in either thousands of dollars (or tens, hundreds or millions) of saved or additional taxes – so take a split second and consider what your strategy is and how you should execute it. Even if you haven’t given tax any consideration, it may not be too late to consider changes to your structures. However, getting it right first time is a lot cheaper and easier than trying to change it in the future.
The professional financial services community is catching up with regards to expertise in cryptocurrency. While many investor advisers, financial planners and accountants are still not accepting cryptocurrency as a legitimate asset and investments, that’s changing rapidly and now more than ever you’ll find professionals that you can talk to about getting your structures right.
Also playing catch up is the ATO. However they’re now looking into cryptocurrency more than ever, so as mentioned earlier in the article, assume that they are watching and know what you’re doing. If you’ve made a mistake with how you’ve calculated your tax in the past, don’t panic. Contact your accountant and discuss with them what’s happened and they will give you suggestions of how to fix it. If you approach the ATO with a correction, they’re quite willing to work with you to sort it out.