Crypto-currency tax: the beginners’ guide
You’ve entered the world of cryptocurrency investing. You’re getting your head around the language – wrapping, mining, airdrops, staking, forking.
However, what does this all mean when it comes to tax time?
Well, this is the cryptocurrency tax guide for you.
We’ll take you through what you need to do for crypto-currency tax reporting, as well, as tips to make this easy, so it’s not a huge headache, that you want to run away from!
Ready, set, let’s go!
- cryptocurrency investments and the ATO
- What to do when buying cryptocurrency?
- Tax and cryptocurrency
- How much capital gains tax do you pay on cryptocurrency?
cryptocurrency investments and the ATO
Let’s bust a few myths first.
Contrary to what your mate says, unfortunately, there are no special tax rules for crypto assets.
Yes, generally speaking, crypto operates independently of a central bank, authority or government. However, all crypto transactions are subject to the same tax rules as assets generally – assets such as shares and investment properties.
The second myth – crypto is anonymous. Nope. Each cryptocurrency transaction leaves electronic tracks where it interacts with the real world.
The Australian Taxation Office (ATO) uses data matching where crypto exchanges provide the ATO with information on its transactions.
So what crypto assets are the ATO referring to?
There are many types of crypto assets in the marketplace, and the nature of these assets means they will continue to evolve in their form and function.
Common types include – Bitcoin, USDC (a stablecoin), DAI (investment token), GALA the game token and BAYC, the non-fungible token. [pls enter others here]
What to do when buying cryptocurrency?
We’re going to start at the top.
In Australia, you are required to record the value of the cryptocurrency in your local currency at the time of the transaction.
This can be extremely time-consuming to do by hand since most exchange records do not have a reference price point, and records between exchanges are not easily compatible.
When you buy cryptocurrency there are two things to do –
- Make sure you buy it in your full name
Besides being a requirement, this way when it comes to declaring it on your tax return, your records will match with the ATO.
- Keep records of EVERY transaction
You need to record the purchase price of the cryptocurrency and the date you purchased them.
Sleek scoop: you will need this when you sell the crypto as the market price (purchase price) will become part of the cost base.
So, let’s look into this some more.
All too hard, already? Sleek’s crypto tax accountant service is exactly for investors like you.
Tax and cryptocurrency
The ATO considers cryptocurrency, as property, which is why they classify it as an asset. Therefore, you need to declare your crypto with the tax department.
There are two ways you need to declare your cryptocurrency on your tax return. You are liable for both capital gains and income tax depending on the type of cryptocurrency transaction, and your individual circumstances.
For example, you might need to pay capital gains on profits from buying and selling cryptocurrency or pay income tax on interest earned when holding crypto.
1. Declaring income from your crypto assets
There are two ways you can receive income from your crypto assets –
- Staking rewards
If you have locked your crypto asset tokens to validate transactions on the blockchain and created new blocks, you have become a forger.
Forgers, like miners, hold units of crypto assets to validate transactions and create new blocks. When a transaction is verified on the network as valid there is a consensus, thus a proof of stake.
Let’s say you have staked your tokens to a pool as a premium staker. You receive additional coins when your pool participates in consensus as well as perhaps, a small payment of tokens from the node leader for supporting the node.
When you receive these extra tokens through either of these two transactions, you will need to include the money value of these additional tokens in your ordinary assessable income.
You will use the market value at the time you receive the tokens, as the cost base of your additional tokens.
Any time you receive a reward in the form of additional tokens from your holding of the original tokens will be considered ordinary income at the time you receive the tokens – and declared on your tax return as other income.
Airdrops are used to distribute crypto assets through a group of people to build their use and popularity.
As the tokens are an initial distribution, there has been no trading in the project’s token prior to the airdrop, therefore, their cost base is $0.
You do not derive ordinary income or make a capital gain at the time you have received them.
Others use airdrop of new tokens to token holders as a way of increasing the supply of tokens. When the tokens are not free, the cost base will be the amount that you pay to acquire them.
If you receive an airdrop of tokens, these are considered as ordinary income at the time you receive them. You will need to declare this income in your tax return as other income.
2. Declaring Capital Gains Event
A capital gains event is triggered when you dispose of your crypto.
So, what do we mean when we use the term dispose?
If you sell, trade, transfer, exchange, convert, gift, swap, change its ownership or use your crypto to buy something. If you look at it this way – it is any transaction where you don’t own the cryptocurrency anymore.
This action triggers a capital gains event for taxation purposes and the transaction must be declared on your tax return.
Your capital gain is the difference between the cost base (the price you paid for the crypto) less the sale price (the price you sold the crypto for).
Let’s say you purchased 100 BITCOIN for AUD1000 and you sold the 1000 BITCOIN for AUD2000. Your capital gain is AUD1000 – you made a profit of AUD1000.
Alternatively, you purchased 100 BITCOIN for AUD1000 and sold the 1000 BITCOIN for AUD800. Your capital loss is AUD200 – you made a loss of AUD200.
- Every crypto transaction must be converted into Australian dollars at the time of the transaction. This is why excellent record-keeping is a must!
- You must declare all capital gains tax events in your tax return, regardless of how much the profit and loss was.
- If your capital gains for your cryptocurrency transaction is over $10,000 you will need to complete a capital gains tax schedule.
How much capital gains tax do you pay on cryptocurrency?
There will be two scenarios that will affect how much capital gains tax you will pay –
- If you hold your crypto assets for less than a year – subtract your cost base (the purchase price) from your sale price. This final amount is reported as net capital gains.
If you make a loss, you will still need to provide the details on your tax return. Enter the total amount you sold the cryptocurrency in the box labelled ‘total current year capital gains.
Because you are not able to enter a negative amount in your tax return, put a zero in the box ‘Net capital gain’. Enter the amount again at ‘Net capital loss carried forward to later income years.
A capital loss can reduce a capital gain or you can carry forward losses to offset gains in a future year.
- If you hold your crypto assets for 12 months or more and are an Australian resident for tax purposes – you may be entitled to a 50% discount on capital gains.
- Regardless of the type of crypto assets you purchase (even if you hold it in the same digital wallet or hardware wallet) you need to treat each crypto asset you hold as a separate asset.
- There are many types of crypto assets, with their form and function continuing to evolve, so it’s important to keep ahead of the taxation rules.
- If you move or transfer your cryptocurrency from one wallet to another, you do not have to pay tax on the transaction if the new wallet is under your name. (Remember, its only a disposal if you no longer hold the crypto. Keep track of the purchase price in your records.)
- Download a crypto tax report from your provider to show your profit or loss and capital gains in the financial year. This comes in handy when calculating your tax liability.
- If you think you have made a mistake on your tax return, no problem, you can lodge an amendment to the return.
With crypto investments ever-changing and complex tax returns, it may be time to call Sleek. Our crypto tax accountant service is all about making the lives of investors easier.
Let’s get started – call us on +61 2 9100 0480 or book an appointment with a Sleek accountant now here.
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