The ATO states that crypto is taxable. But the amount of tax you’ll pay depends on whether you’re seen to be an individual investor or a sole trader. Not sure which category you fall into? We’ve got everything you need to know about what the ATO views as a sole crypto trader, how much tax crypto traders pay, crypto business taxes and even how to reduce your tax bill. Let’s dive in.
Crypto investor vs. crypto trader
The ATO views crypto investors in one of two ways - either as an investor or as a trader. The category you fall into dictates the way you’re taxed.
So how do you know which you are? Well, the ATO has some guidance.
We’ve got a whole guide on how crypto is taxed for individual investors, but in brief, a crypto investor is exactly what it sounds like - an individual investing in a future return. In this instance, an individual investor who buys, trades and sells cryptocurrencies with the goal of gradually building wealth over a long period of time.
Meanwhile a crypto trader is an individual actively investing in the crypto market to generate an income, both short and long-term, who is essentially operating a business set up. This could include regular day trading to generate short-term gains, crypto mining, running a crypto exchange and more.
The ATO says not all investors acquiring and disposing of crypto will be considered traders. They state the following indicates that you’re carrying on business:
- You carry on your investment activities for commercial reasons and in a commercially viable way.
- You undertake activities in a business-like manner, for example having a clear business plan and acquiring capital assets in line with your business plan.
- You intend to make a profit and genuinely believe you’ll make a profit, even if you are unlikely to do so in the short-term.
- Your investment activities are regular and repetitive.
It’s important to note that the ATO also states that there may be situations where an isolated crypto transaction (or series of transactions) may be viewed as commercial and as such treated as ordinary income instead.
Crypto trader vs crypto business
To further confuse things - it also matters if you’re operating as a sole trader or if you’ve created and registered a company from a tax perspective according to the ATO. The differences are plentiful - but in summary:
- Sole traders can utilise the tax free threshold. Companies have no tax free threshold and pay tax on every dollar the business earns.
- Sole traders pay the individual Income Tax rate, while companies pay the 30% tax rate (although they may pay a reduced rate if eligible).
- Sole traders lodge an individual tax return each year, while a company would need to lodge its own tax return as a separate legal entity (and you'd still need to lodge an individual tax return).
- For Capital Gains Tax, sole traders may be able to reduce the capital gain through the discount method, indexation method or through one of the 4 Capital Gains Tax concessions available for small businesses. For companies, the discount method does not generally apply when calculating capital gains. It’s important to note for crypto traders or businesses, these discounts generally won’t be applicable - these discounts only apply when a business has a CGT asset outside it’s ordinary course of business (like if a restaurant sold a property). Because crypto is treated as trading stock for businesses and sole traders, these CGT discounts would only be eligible for non-crypto assets.
- Both sole traders and companies may access small business tax concessions including, income tax concessions and PAYG instalment concessions.
All this to say, the business structure you’ve elected to use matters. A crypto mining business could be considered a sole trader or a registered company - depending on which business structure you've opted to use. Similarly, a crypto trader could be considered a crypto business if the individual put all their crypto trading activities through a registered company.
How are crypto traders taxed in Australia?
If you are viewed as a trader - this dictates how you’re taxed. We’ll start with the bad news first - the Capital Gains Tax rules don’t apply for traders as crypto is treated as trading stock instead. So crypto traders in Australia cannot access the 50% long-term Capital Gains Tax discount that individual investors can.
Instead, all your profits are viewed as ordinary income and subject to Income Tax (based on the individual Income Tax rate).
However, this comes with some good news, because the cost of acquiring crypto held as trading stock is deductible. We’ll explain with an example.
You sell 1 BTC for $58,000 AUD in September 2021 and make an $8,000 profit as you bought it for $50,000 earlier in the same year. The $58,000 sale is considered to be taxable income, and the $50,000 cost is deemed to be an expense of the trading business. On the same day, you purchase 10 ETH for $42,000. This $42,000 is another trading expense of the business and therefore tax deductible.
Assuming you made no other sales or purchases in the year, your net income from your crypto trading business would be a loss of $36,000 ($58,000 - $50,000 - $42,000). These losses can be used against your ordinary income to reduce your tax liability.
How much tax do crypto traders pay?
The tax rate for sole crypto traders is the same as the individual Income Tax rates. You can see the individual Income Tax rates for the 2021 - 2022 financial year below:
So the amount of tax you pay will be based on your total annual income. You won’t pay the same flat rate on all income either, the ATO individual Income Tax rates are progressive, so you’ll pay a higher rate of tax on higher earnings.
You’re viewed as a crypto trader by the ATO as it’s your main source of annual income. You made $50,000 throughout the 2021 - 2022 financial year.
Your first $18,200 of income is tax free. You’ll then pay 19% tax on the next $26,799 of income and finally, 32.5% tax on the final $5,000 of income - or roughly $6,717 in total.
Please note this example doesn't tax into account the Medicare levy surcharge. You can use the ATO Income Tax calculator to get an idea of your tax liability as a sole trader.
Which crypto transactions will you pay tax on?
So you know how you’re taxed and how much you’ll pay in tax… but when will you be taxed?
There are many crypto transactions that are taxable for crypto traders, including:
- Selling crypto for AUD.
- Trading one crypto for another (although the new crypto acquired would be deductible).
- Spending crypto on goods or services.
- Gifting crypto - yes, even if it’s to your loved ones with a lower tax rate.
- Becoming a validator and earning through PoW or PoS.
- Being paid in crypto.
- Selling NFTs you create.
- Airdrops of crypto.
- A variety of DeFi transactions including staking, liquidity mining and yield farming.
- Trading crypto derivatives, futures and leveraged products.
You’ll pay Income Tax on all profits from the transactions above. There are a select few transactions however that are tax free (and even deductible!) for crypto traders including:
- Buying crypto with AUD - in fact, this is deductible.
- Hodling crypto.
- Transferring crypto between your own wallets - and related gas fees may be tax deductible.
How to reduce taxes as a sole trader
In order to minimise your tax liability, it will be important to keep track of all expenses you incur during the year. If these relate to your sole trader business, then you will be able to claim a tax deduction.
According to the ATO, a business expense must meet three criteria to be claimable as a tax deduction:
- The payment must directly relate to operating your business and not be for personal use.
- If the payment is for both business and personal use, you can only claim the portion of the cost that is used for your business.
- You must have records to prove it. Note that having a ‘record’ doesn’t always mean you need a receipt (bank statements, email correspondence with sellers or other forms of evidence which can verify you made a purchase would be acceptable)
You can claim anything you purchase which is then used to generate business income. If your home also serves as a base for your business you may be eligible to claim home expenses, however it will be prorated based on the space within the property utilised for business purposes.
For example, if you use your home office space to carry out your crypto trading activities, and the area of your home office is 25% of the total area of your house, then you will be able to claim 25% of property expenses. This could include rent/mortgage interest, utilities (including phone, water, insurance internet, electricity and gas), cleaning costs or repair costs.
In addition you could claim general home office costs (such as stationery, printer paper and ink). You may also be able to claim depreciation as an expense for any depreciating assets you purchased. A depreciating asset is an asset that declines in value over time. This includes:
- Office equipment and machinery
- Furniture, carpet and curtains
Sole traders and freelancers with an annual turnover of less than $500 million can claim an instant deduction on assets worth less than $150,000 in the year they are purchased. For example, if you buy $15,000 worth of computer equipment during the financial year, you can claim the full $15,000 deduction in your tax return for the year.
How to calculate your crypto taxes as a trader
Unlike individual investors, crypto traders are limited to using the FIFO accounting method (which Koinly supports).
Calculating your crypto taxes as a sole trader is thankfully pretty straightforward. Just subtract all your purchases from your sales, and add in any other relevant income (minus expenses) from other crypto activities to give you your total annual income from crypto. Assuming it’s a profit, this is what you declare to the ATO.
How to report and pay crypto tax as a trader
Sole traders have slightly different tax reporting requirements to individual investors.
There is no separate business tax return for sole traders. So you'll still need to file your annual Income Tax return each year, and report all your income in your return. You’ll report your income and expenses in the section for business items. You can do this using the ATO’s myTax service, just like an individual taxpayer would.
When it comes to paying crypto tax - again things work a little differently for traders. For most crypto traders, the ATO expects you to put aside money to pay your Income Tax at the end of the financial year. Most traders do this through the Pay As You Go (PAYG) scheme. You'll be opted into this after your first tax return that shows you operate above the $18,200 tax free threshold, but you can also voluntarily opt in for PAYG and pay quarterly instalments on your taxes - so you're not left with a large tax bill at the EOFY.
If you're a sole trader earning more than $75,000 a year - you'll also need to register for an Australian Business Number (ABN).
Some sole traders may also be eligible for the small business Income Tax offset of $1,000.
How to calculate your crypto taxes as a trader
Koinly can help crypto traders with their tax reporting obligations with the ATO.
All you need to do is sync the wallets, exchanges and blockchains you use with Koinly via API or by uploading a CSV file of your transactions. Koinly will then crunch the numbers for you and generate your crypto tax report. Traders may need two tax reports - the Buys/Sells report and/or the Complete Tax Report - depending on their investments.
You can then use these figures to file with the ATO.