Cryptocurrency and Your Tax – How Does It Work in Australia

cryptocurrency

Cryptocurrency is not for everyone due to its many complexities. And adding crypto taxes to the conversation can complicate things further. But it doesn’t have to be. We’re here to help you with everything you need to know, especially when it comes time to file your Australian tax on cryptocurrencies with the Australian Taxation Office (ATO).

But first, let’s take a look at some cryptocurrency. This landscape is quite diverse and there are now more than 1,600 cryptocurrencies on the list. However, since the phenomenon began, two have remained the most popular: Bitcoin and Ethereum. Of the two, Bitcoin is considered the most important crypto – the first ever launched in 2009. This is how the entire crypto movement started.

And because of its popularity, more and more traders joined. Those who understand blockchain technology also created their own cryptocurrencies. The whole system has become more prominent and eventually has a lot of supporters. The ATO soon developed guidelines for crypto taxation. And just five later after the introduction of Bitcoin, this directive went into effect on December 17, 2014.

How does the ATO know about your crypto transactions?

About 500,000 to a million Australians own cryptocurrency, according to the Australian tax office. To further determine the numbers, the ATO began collecting records in late 2019 to ensure that people, including those who trade cryptocurrencies, pay their taxes correctly. The office has worked with Australian cryptocurrency designated service providers (DSPs) to regularly collect data related to brokerage services and payment facilitators. DSPs also include cryptocurrency exchanges and bitcoin ATM providers.

Data collection by the ATO includes the following records:

The details of the owner of the digital currency, including their name, address, date of birth, phone number, email address, date of birth, and account information

Account information, such as account status (whether open, lost, or suspended), currently connected bank accounts, wallet address, unique identifier, and transaction date and time

The data collection process indicates that all cryptocurrency transactions you make leave an electronic record. This record is used by the DSP in accordance with the ATO tax guidelines.

Therefore, when it comes time to file your tax return, the ATO will review your return and compare it with the data they have collected from the DSP. This process assures the ATO that you are fair, especially when disclosing your crypto activities. It is important to check that you are paying the correct amount of taxes because the ATO knows if your tax return does not match your crypto transactions.

How Taxes Work for Cryptocurrency Traders?

In early March 2020, it was reported that approximately 350,000 Australians have received an email from the ATO. Usually, the tax authorities only go after those with large amounts of under-reported taxes. However, it seemed that the ATO seemed to be focusing on every single trade, even the small one. This puts a significant emphasis on the fact that the ATO requires accurate tax reporting for everyone, including crypto traders and investors.

In Australia, it should be noted that cryptocurrencies are subject to two types of transactions depending on certain circumstances. Crypto traders may have to pay capital gains tax (CGT) or regular income tax – or both.

Generally, you don’t have to pay income tax or GST if you don’t run a business. You simply pay for the item you bought with cryptocurrency, such as Bitcoin. However, cryptocurrencies are considered CGT assets, which means that you have to pay for this particular tax when a transaction takes place using a cryptocurrency.

However, there are certain instances where your transactions are exempt from CBT, including:

You use cryptocurrency to buy goods and services for yourself. For example, you book a hotel online with Bitcoin.

The transaction is less than $ 10,000.

Meanwhile, if the transaction costs more than $ 10,000, CGT will apply. This particular tax is based on the value of the crypto you used during the purchase and the value during the sale.

If you hold the cryptocurrency for more than 12 months before selling it, you are eligible for a CGT discount. These discounts include:

50% for Australian residents, including those working as partners in partnerships

33.33% discount if the taxpayer meets super funds and specific life insurance companies

This 50% discount does not apply to foreign residents capital gains made after May 8, 2012. If the asset is held for 12 months (or less), it has no CBT discount.

There are certain events that are considered non-CGT such as crypto decentralized financing (DeFi) income. These events are considered ordinary income and will therefore be taxed as part of total taxable income according to the rates implemented by the ATO.

While you may be required to pay the CGT tax, as of July 1, 2017, your transactions will be exempt from goods and services tax.

The position of the ATO

Since many traders buy or obtain smaller cryptocurrencies when they are worth thousands of AUD, the ATO relies on data to ensure that taxpayers meet their tax obligations. At the time of publication, 1 BTC is approximately $ 69,400 +. But let’s say you got it when it was worth $ 10,000. You then spent or sold it after its value increased to $ 20,000. You may have to pay $ 10,000 as part of your taxes. The gains and losses are what the ATO is looking for.

According to the ATO, it does not consider Bitcoin and other cryptocurrencies to be Australian or foreign currencies. Nor are they considered money. Instead, these digital currencies are considered proprietary. For CBT purposes, cryptocurrencies are assets, so CGT applies as soon as you:

Sell ​​a cryptocurrency

Send a cryptocurrency as a gift

Exchange crypto for another fiat or crypto

Convert to fiat currency, such as Australian dollars

Buy goods and services

You can be taxed as a private individual or as a company (professional). It is essential that you know your classification according to the ATO standards. This is the first step in determining how you will be taxed as someone dealing with cryptocurrencies.

As an individual, you are considered an investor if your primary purpose or activity is to buy and sell Bitcoin or other cryptocurrencies. You invest mainly for yourself, which means that your income will consist of capital gains, airdrops and forks.

Most of the people engaged in crypto business are classified as investors. That’s why they have to pay for CBT.

On the other hand, you are considered a merchant or a company (otherwise known as a professional) who is conducting a more serious trade. Its primary purpose is to generate income through crypto exchanges. If you buy and sell to make a profit, the ATO will tax you as a business. It’s quite complicated because trading isn’t all about frequency and volume. You can still be a trader despite having less crypto business than an individual or investor.

This classification must be on your part when you directly or indirectly suggest that you are trading for business purposes. The ATO will also conduct an assessment to determine whether you meet this classification.

Crypto Activities and Their Tax Implications

Buying and selling are the main actions that crypto traders and investors take. Certain transactions cause a CBT event, while others remain untaxed:

Buy crypto

When you buy cryptocurrencies with Australian dollars or any other fiat currency, you do not have to pay tax.

However, it would help if you still document or record the amount you paid for buying the cryptocurrency. Also include the date and time of the purchase. These pieces of information can be used to calculate your capital gains.

Sell ​​crypto

Selling crypto to earn fiat currency triggers CGT. Let’s say you bought 1 BTC for about $ 5,000 five years ago. Now if you sell the BTC for $ 12,000 and cash it out, you will pay $ 7,000 in CBT.

Trading with cryptocurrencies

Buying a crypto with another crypto is also a CGT trigger. For example, you buy 1,000 ETH with 1 BTC. This BTC was from five years ago and was estimated at $ 1,000. During the purchase of 1,000 ETH, your BTC is already worth $ 10,000. This means that your capital gain for this transaction is $ 9,000.

Visit Also: Tax Agent in Melbourne

Crypto Transfers

If you plan to move your cryptocurrency from one wallet to another, it is usually not taxable. The same rule applies to exchanges to another wallet. Any relevant transactions that you had control over are not taxable.

Buying goods with Crypto

If you use Bitcoin or any other cryptocurrency to buy goods and services, they may be excluded from your taxes. However, the amount cannot exceed $ 10,000. If the cost base is greater than $ 10,000, the Personal Use Exemption does not apply. However, you become the norm eally taxed on the capital gains.

Airdrops

If you receive coins through an airdrop as part of the way a crypto project promotes itself, you may be charged for this. You are obliged to report the airdrop in which the coins belong to your normal income. The specified amount becomes the cost basis for the airdrops.

For example, you receive 1,000 coins from a fairly new crypto project. During that day, this cryptocurrency was worth $ 0.10 per coin. You must declare $ 100 as part of your regular income.

What happens if the price of this crypto rises in about five months? If you sell the aired coins, report the new value as capital gain. If the new price is $ 0.50, selling 1,000 coins means $ 400 CGT.

Forks

Also known as chain splits, you can incur charges if a blockchain splits in two (or more) depending on the type of fork. In most cases, the original chain will still function as normal. There is zero base on the new forked asset, but you still pay CGT when you remove the new one. There is no impact on the initial or original asset, nor on ordinary income.

If the original chain stops working, the new assets have a zero base. CBT applies if you dispose of the new one. The primary chain is considered a complete loss of capital. No ordinary income is reported.

As an example, we have the case of the Ethereum split, which took place in July 2016. There were now two assets: Ether (ETH) and Ether Classic (ETC). ETC still retains its rights with the original chain, so it is considered the perpetual possession. On the other hand, ETH is the new one, created after the chain division. Hence, ETH takes on a zero basis.

Tax reporting on cryptocurrencies

The most important thing to remember when filing your tax return is to include every crypto transaction you made between July 1 and June 30. Filing your own tax return means that you must have it completed by the last day of October at the latest. However, if you have an accountant or tax agent to assist you, you have until March 31 of the following year.

As usual, you will need to keep track of certain records of your crypto activities, which should provide the following information:

Transaction date

Crypto value on the specified transaction date

Purpose (personal use, gift, etc.)

Details of the recipient or other involved party (can simply be the crypto wallet address)

We recommend keeping all receipts, exchange details, agent invoices and digital keys or wallet records as evidence. Filing your crypto tax is the same as your regular income tax.

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