A guide to crypto tax

Bitcoin and other forms of digital currency have proved popular over the last decade, with many individuals and businesses buying cryptocurrency as a new way to make investments.

More recently, the market has proved to be hugely volatile, losing more than US$2 trillion in 2022.

There are no special tax rules for crypto assets. The tax treatment will depend on how you acquire, hold, and dispose of the asset.

See below for our guide to paying tax on cryptocurrency.

What is cryptocurrency?

Cryptocurrency, also known as crypto, is a digital or virtual currency that only exists online. It is secured using cryptography which prevents counterfeiting and fraud.

Cryptocurrency transactions are managed using distributed ledger technology (DLT), a decentralised database that removes the need for cryptocurrency to be issued or controlled by a central authority such as a bank or government. The most well-known DLT system is blockchain.

Launched in 2009, Bitcoin was the first type of cryptocurrency. Since then, many other cryptocurrencies have been created including Ethereum and Litecoin.

Fundamentally, while cryptocurrency can be used as a means of exchange, it is not recognised as currency or money since it can be too volatile as a reliable store of value and not widely enough accepted as a means of exchange and it isn’t recognised as a unit of account.

You can pay for goods and services using cryptocurrency, but many people buy, transfer, store and trade it as an investment. This also includes non-fungible tokens (NFTs).

NFTs are not interchangeable in the same way as crypto coins or tokens. An NFT typically records ownership of digital pictures or artworks, video clips, memes and items used in online games.

Common crypto assets

There are many types of crypto assets, with their form and function continuing to evolve.

Common crypto assets include coins and tokens such as:

• Bitcoin, a cryptocurrency
• USDC, a stablecoin
• DAI, an investment token
• GALA, a game token
• BAYC, a non-fungible token.

You can control different types of crypto asset in the same digital or hardware wallet. However, for tax purposes you need to treat each crypto asset you hold as a separate asset.

Where is cryptocurrency located for tax purposes?

Since cryptocurrency is digital in nature, it does not have a physical location. It is still necessary to determine the location for tax purposes.

Where a cryptocurrency is simply a digital representation of an underlying asset, then the location of the cryptocurrency will be the location of the underlying asset. Typically, this won’t be applicable to most forms of cryptocurrency.

Instead, cryptocurrency is normally distinct from any underlying asset and its location will be determined by the residency of the beneficial owner, which gives a clear, logical, predictive and objective rule which can be easily applied.

Do you pay tax on crypto gains?

If you are buying and holding crypto assets and then selling them according to market conditions, you are likely to be investing and your gains or losses will be taxed as capital.

The broad position is:

• Crypto assets are taxed as capital gains tax (CGT) assets, including for self-managed super funds (SMSFs) investing in crypto assets. CGT may occur when you sell, gift, trade, exchange or swap, convert to fiat currency, or purchase goods or services. The same applies in the event of destruction or the loss or creation of contractual or other rights.
   
• Rewards for staking crypto are ordinary income for tax purposes.

Businesses transacting in crypto assets may need to account for them as trading stock or ordinary income (that is, on the revenue account rather than as investment capital gains or losses). In these circumstances, the cost of acquiring crypto assets and the proceeds from disposing of them is ordinary income or a deductible expense depending on the nature of the transaction.

In some circumstances, crypto assets are not kept mainly for investment but for personal use. Where specific conditions are met, crypto assets are not subject to CGT because they are considered to be personal use assets.

When do you pay tax on crypto?

You can report your cryptocurrency gains and losses on your annual tax return.

While crypto may appear anonymous, the Australian Taxation Office (ATO) can track money trails back to taxpayers through data from banks, financial institutions and crypto asset exchanges. A spokesperson warns, “Anyone choosing not to act may receive further scrutiny and an audit of their affairs.”

• Transactions such as disposal or exchange or swap are a CGT event and result in either a capital gain or capital loss. Capital losses can be applied against other capital gains but can't be deducted against other income.
   
• If the crypto asset has been held for at least 12 months, individuals may be able to apply the 50 per cent CGT discount when calculating their gains.
   
• If it can be shown that crypto is not being utilised as an investment, in a profit-making scheme, or carrying on a business, and cost less than $10,000 then it may be a personal use asset and not subject to CGT.
   
• If crypto is used as a personal use asset, the loss cannot be considered when calculating a net capital gain to carry forward in future years.

Record keeping

To calculate CGT, clients will need to have excellent records. Keep records of all cryptocurrency transactions.

This includes:

• type of tokens
• date you disposed of them
• number of tokens you have disposed of
• number of tokens you have left
• value of the tokens in dollars
• bank statements and wallet addresses
• a record of the pooled costs before and after you disposed of them

TaxAssist Accountants can help you with your Cryptocurrency Taxes

If you are currently investing in, or considering disposing of cryptocurrency, we can advise on tax planning opportunities that could mitigate or reduce your potential tax liabilities. Call 02 9174 5757 or use our enquiry form to book a free video or face-to-face consultation.

Last updated: 18th May 2023