How are your Crypto currency gains taxed?
This is not a difficult question to answer, the ATO is clear on this and any good tax adviser will be able to advise you on how you are taxed. In my experience sorting out the tax is only the 1st step in the advice process and most clients need the following 3 advice pieces from us:
- How you are taxed,
- What steps if any can help you minimize your tax payable OR claim your tax losses,
- How to create an overall wealth plan.
The 3rd point is our point of difference. You are welcome to discuss your specific situation and any concerns with our principal @ VJC , Adrian Chaudhary .
Below are the different ways crypto gains/losses are taxed, in our experience the majority of tax payers will be assessed and pay tax under the capital gains tax laws and not the income tax laws which is a good thing.
The ATO has released this short video on how crypto is taxed which you can view here – crypto assets and they have the following fact sheet Tax treatment of crypto assets.
Investment profits = Capital Gains tax
The majority of investors/punters/speculators acquire cryptocurrency as an investment, they want to buy and make money from an increase in the price of the asset.
- A capital gain is made when you sell or otherwise dispose of the crypto asset for more than you paid for it i.e. at a profit. A capital profit for an individual can be reduced by 50% if you owned the asset for more than 12 months. Previous losses can reduce the gain before the 50% discount applies. If you have enough losses, you can reduce your profit to zero and carry forward any remaining losses.
- Similarly, a capital loss occurs when you dispose of the crypto asset for less than what you paid for. This loss carries forward indefinitely and can be used to reduce future gains.
Your disposal occurs when you receive the amount from the sale/disposal or it is applied for your benefit i.e. you use the asset. There is no taxing event when the market value of your cryptocurrency changes.
Paying tax on a Capital Gains basis is good for most investors because:
- If you hold each asset for more than 12 months you will be eligible for the 50% CGT discount (effectively, halving the amount of profit you pay tax on). Put simply, if you are on the top tax rate then you pay 23.25% tax on your profit, not 46.5%.
- If you have any capital losses you can use these to reduce the gain/profit right down to zero.
Many investors do not understand what is considered a disposal event, some common examples are:
- If you sell any of your crypto and receive money for it.
- If you spend some of your crypto to buy something then that’s a disposal.
- If you sell/swap Crypto A for Crypto B then that’s a disposal.
- When you lose your wallet or it is stolen then you have a likely capital loss!
No tax = Personal use assets
There are occasions when you are not taxed because your crypto is a Personal use asset, basically that means that you only acquire crypto to spend the currency to buy things shortly after acquiring it. This does not apply to the majority of people and the amount that is allowed is capped.
Income tax to pay = Staking rewards and air drops
When providing either of these roles/services the investor may receive payment in the form of additional crypto assets, the value of these are ordinary income and NOT a capital gain. This means you pay income tax on the value of these in $AUD.
New capital asset or a capital loss from Chain splits
Sometimes an event occurs that creates a new asset from an existing asset, in this case the original cost needs to continue with the asset that is unchanged from the original. This is relatively simple and you can read examples in the link below.
Crypto Business = Income Tax
This is unlikely for most people, but if you are engaged in a business then you pay income tax on your profit at your marginal tax rate and would also claim or carry forward your losses.
The criteria to determine if you are running a business is the same as it always has been, some of the main factors are:
- You have a commercial reason and a commercially viable operation,
- Activities are conducted in a business-like manner with proper records and systems,
- There is a genuine profit-making intention.
If you are in business, then the crypto asset is trading stock and the income tax rules and not the CGT rules apply. Selling trading stock in a business is ordinary income, and the cost of purchasing/acquiring crypto held as trading stock is a deduction and you pay income tax on your profit each year.
Examples of businesses that involve crypto include cryptocurrency trading, mining and exchange businesses (including ATMs).
Please note that not all people acquiring and disposing of cryptocurrency will be carrying on businesses and in practice the majority of investors are not.
Contact Adrian Chaudhary at VJC to discuss your tax and investment queries.
General Advice warning: the information in this article is general in nature, it is not advice specific to your needs. If you want to act upon the information in this article then you should seek advice from a qualified professional. VJC accepts no liability to any party for acting from this information unless they have sought advice in a formal engagement with VJC for this purpose.
