Cryptocurrency transactions are subject to both Income and Capital Gains Taxes in Australia. The Australian Tax Office (ATO) has set forth strict guidelines on how cryptocurrency trading and mining are taxed. This guide breaks down everything you need to know about crypto taxes and how you can avoid notices, audits and penalties later on.
In June 2020, the ATO began sending out letters to some 350,000 cryptocurrency investors.
It obtained information on these investors through a new government initiative launched in April 2019 which requires crypto exchanges to share data with the government.
Received this letter from the ATO?
This is not a notice so you do not need to worry just yet!
However, it clearly tells you that the ATO is onto your crypto activity so you will need to amend your previous tax reports if you werent so forthcoming before and definitely include crypto gains on future reports.
Of course, reddit has also been ablaze with crypto traders scrambling to get a handle on crypto taxes:
How are cryptocurrencies taxed in Australia?
Most cryptocurrency transactions fall under the capital gains tax regime which requires you to pay a tax on the profit/loss from your trades. Other popular crypto activities such as mining/staking fall under regular Income tax.
- Capital gains tax is paid on the profit or loss from a trade ex. if you paid $1000 for 1 BTC and sold the Bitcoin later on for $2000, then you will pay a capital gains tax on the $1000 profit. If you make a loss on the trade then you can deduct it from other profits or even carry over the loss to future years.
- Income tax is charged on the fair market value of the received coins, ex. if you mined 0.05 BTC worth $300 then you will have to pay income tax on the whole $300. If you later sell this Bitcoin for $400 then you will have to pay an additional capital gains tax on the $100 profit.
Here's a breakdown of the most common crypto scenarios and the type of tax liability they result in:
Like in most parts of the world, there are no taxes on buying or hodling cryptocurrencies in Australia. However, keeping accurate records of the purchase is very important so that you can calculate the cost basis of the transaction when you decide to dispose of the crypto.
This is a taxable event and results in capital gains tax.
Craig purchases 0.1 Bitcoin in July 2017 for AU$1000 and sells it in November 2017 for AU$2000. His total capital gain is thus AU$1000.
CAPITAL GAINS TAX
Trading or exchanging crypto
Trading one crypto for another (ex. BTC → XRP) is also a taxable event.
The ATO sees a trade as 2 separate transactions, first you are selling your BTC for X amount of fictional dollars, then you are buying ETH with these fictional dollars.
Even though you never received any dollars in hand, you still have to pay tax on the sale of the BTC.
The market value (in AUD) of the purchased coins is used to determine the capital gain. If the cryptocurrency that you received can't be valued, you will have to take into account the market value of the crypto you sold at the time of the transaction.
Let's say you purchased 1 Bitcoin for AU$1000 in July 2017.
In November 2017, you exchanged 0.5 Bitcoin for 3 Ether.
At this time, the market value of 3 ether was around AU$2000.
This means your capital proceeds come to AU$2000 and the cost of acquisition is AU$500. In other words, your capital gains would be $1500.
CAPITAL GAINS TAX
Trading with stablecoins
A stablecoin is simply a class of cryptocurrencies that offers price stability by being backed by a reserve asset, usually a stable fiat currency like USD. As far as the ATO is concerned, stablecoins like TrueUSD are exactly the same as any other cryptocurrency, and so the tax treatment is the same as for regular crypto to crypto exchange.
There is no major advantage or disadvantage between trading with fiat and trading with a stablecoin when it comes taxes.
CAPITAL GAINS TAX
Participating in an ICO / IEO
ICOs (Initial Coin Offerings) or IEOs (Initial Exchange Offerings) refer to a situation where investors can purchase tokens/coins in a yet-to-be-released cryptocurrency/company.
This purchase usually happens by paying for it in existing cryptocurrency likes Bitcoin or Ethereum.
So from a taxation perspective, this amounts to a crypto-to-crypto trade. So the taxable event is triggered on the date of the ICO transaction, when you receive the new tokens. When you sell the new tokens at a later date, the cost base of that transaction will be the value of the cryptocurrency that you paid for it on the date of the ICO/IEO.
CAPITAL GAINS TAX
The ATO has stated that any airdrops received from an established token are considered ordinary income at the fair market value of the tokens on the date you received them.
- For ex. if you receive an airdrop of 20 BTT which are worth about $10 then you would have a taxable income of $10.
Token address change / mainnet launch
When a cryptocurrency changes its underlying tech for ex. when EOS went from the ETH blockchain to the EOS mainnet or when DAI changed its contract address and named the old coin SAI - there are no tax liabilities.
Note that if your old coins continue to hold value even after the new ones have been issued then the ATO may consider this as a fork and not a swap - this may give rise to a CGT event.
Forks / chain-splits
Forks are taxed differently depending on what happened to the original blockchain:
- If the original blockchain is still active then the forked assets get a cost of zero and you only have to pay capital gains tax when you eventually sell them. There is no ordinary income here.
- If the original blockchain is abandoned and the fork results in two completely different blockchains then this would be considered a disposal event and you would have to pay CGT on the original coins. The 2 new coins you acquire would get a cost basis of zero and only liable for CGT when you eventually sell them. There is no ordinary income in such cases.
Bitcoin Cash Fork
- Jason held 10 Bitcoin on August 2017
- When Bitcoin Cash split from Bitcoin, he held 10 Bitcoin and 10 Bitcoin Cash.
At this stage, he doesn't derive any ordinary income or incur any capital gains tax.
In June 2018, Alex sells the 10 Bitcoin Cash for $4000.
At this time, his total capital gains is $4000 (since the cost base of the Bitcoin Cash was zero).
Bitcoin Cash ABC / SV Fork
A few days later...
- Jason regrets selling his BCH and decides to buyback 10 BCH for $4000
On November 2018 when the BCHABC and BCHSV forks occur, Jason ends up with 10 Bitcoin Cash ABC and 10 Bitcoin Cash SV.
However, unlike the previous fork where BTC was still active afterwards, this fork has resulted in the original BCH being completely abandoned. This gives rise to a CGT event even though Jason hasnt actually sold anything.
If the market value of 10 BCH on the date of this fork was $2000 then Jason would realize a loss of $2000.
His cost basis for the new BCHABC and BCHSV would be zero.
CAPITAL GAINS TAX
Paying for stuff online
Purchasing goods or services with cryptocurrency is subject to the same tax treatment as selling crypto.
This means that the market value of the crypto that you use to pay for something will be counted as the sales proceeds when calculating the capital gains. So whether you pay bills using crypto or use BTC to pay for meals or coffee, these are all taxable events.
The ATO sees it like this:
- Lets say you pay 1 BTC for a TV (worth $2000). Here you are first selling your crypto for $2000 and using these dollars to pay the seller - this transaction is implied. The disposal of your BTC is therefore taxed as a capital gain.
CAPITAL GAINS TAX
Any proceeds you receive from a mining pool/service or your own mining rig are taxed as ordinary income and will need to be declared on your Income tax return.
Note that when you eventually sell the mined coins, you will still be subject to capital gains tax on the difference between the value you declared as Income and the value at the time of the sale.
You should also keep in mind that the ATO may decide to tax you as a business depending on your mining activities.
In order to determine whether you are mining crypto as a business, check out this section of ATO's website.
Interest from DeFi / Lending / Staking / Masternodes
Lending your cryptocurrency and getting interest on the same generates taxable income. This is similar to mining coins and is subject to similar rules. ou have to declare it on your Income tax statement as additional ordinary income.
Borrowing fiat currency against your crypto:
- As of now, borrowing fiat currency against crypto is not considered a taxable income. At the same time, your collateral may get liquidated by the loan platform if it falls below a specific value. This liquidation would be a taxable event and trigger capital gains tax.
Signup & Referral bonuses
Any crypto you get in return for signing up or referring users to a service is taxed as Income.
Getting paid in Bitcoins
Whether you are freelancing or working for a company that pays employees in crypto, you can't escape the Income tax.
Any coins received as Income are taxed at market value at the time you received them so make sure you declare this Income or you might end up facing the taxhammer.
Gifting crypto to friends & family
Gifting crypto is exactly the same as selling it, so it is a taxable event and you need to pay capital gains tax. The sales proceeds would be the fair market value of the crypto on the date when the gift was made.
When You Receive Cryptocurrency as a Gift:
- You don't have to pay taxes when you receive the cryptocurrency as a gift. However, you will be subject to capital gains tax at the time of disposal. In order to calculate the cost basis of the crypto, you can use the market value substitution rule , which means the cost basis will be the market value of the asset at the time you received it.
CAPITAL GAINS TAX
Transferring crypto between own wallets
Moving crypto between different wallets or accounts is not a taxable event and doesn't trigger capital gains tax. Having said that, it's important to keep track of these movements because automated crypto tax software like Koinly use these movements to keep track of your cost-basis.
Let's say Sam buys 4LTC for AU$1000 on Coinbase. She later moves the funds into her private LTC wallet. A few days later she transfers the LTC from her private wallet to her Binance account and sells it for AU$2000, making a profit of AU$1000.
If Sam wants to use Koinly to generate her crypto tax report, she will have to connect all three wallets. If she doesn't sync her private wallet but only syncs the Coinbase and Binance account, Koinly won't be able to identify that the funds she transferred into her Binance account are the same funds she purchased on Coinbase. However, once Sam adds her private wallet address, Koinly can match the transfer by tracing it from Coinbase to her wallet and then from her wallet to Binance. This will help in producing an accurate tax report.
If she no longer has access to her private wallet, she will have to make some manual changes using the Koinly web interface. She will have to mark the transfer from Coinbase as Ignored so that Koinly doesn't realize gains on it and she doesn't have to pay taxes twice. She would then change the value of the incoming transaction to Binance to match the cost-basis of the outgoing transaction from Coinbase.
Margin trading with crypto involves borrowing funds from an exchange to carry out your trades and then repaying the loan later. There is usually some interest involved as well.
There is currently no guidance on how this is taxed however it is important to note that there is a clear differnce between margin trading and trading with futures, so the rules that apply to futures trading/speculation may not apply to margin trades.
On a futures trade you are speculating on the rise/fall of a coin, on a margin trade you are borrowing funds to carry out some trades. Most exchanges have different platforms for both, for ex. Binance allows margin trading on spot markets, whereas you have to trade on a completely different platform if you want to do futures as well - Binance Futures.
Taking this into consideration, the conservative approach is to simply treat borrowed funds as your own investments and pay CGT on the repayment of the loan (since this would be deemed a disposal).
CAPITAL GAINS TAX
Futures / contracts / options trading with crypto
In futures trading, you are not actually buying or selling any crypto. Instead you are speculating on the rise or fall of the price of a crypto asset in the future. When the future arrives you will either make a profit or a loss (Pnl).
There is no guidance from the ATO on how this Pnl should be taxed but there are 2 possible tax categories that this can fall into:
- Capital gains tax: The profits and losses could be declared as a capital gain on your tax reports. However, there are no actual crypto trades here so whether or not the ATO agrees with this classification is unknown.
- Income tax: This is usually more conservative, you simply declare the final Pnl as income.
Note: If you are using Koinly to calculate your taxes then you can control how the Pnl is taxed on the Settings page.
CAPITAL GAINS OR INCOME TAX
Cryptocurrency tax rates in 2020
Cryptocurrency transactions are taxed at your marginal income tax bracket which depends on your total income during the tax year.
Tax brackets for 2018/2019 to 2021/2022 are:
|Income thresholds||Rate||Tax payable on this income|
|$0 – $18,200||0%||Nil|
|$18,201 – $37,000||19%||19c for each $1 over $18,200|
|$37,001 – $90,000||32.5%||$3,572 plus 32.5% of amounts over $37,000|
|$90,001 – $180,000||37%||$20,797 plus 37% of amounts over $90,000|
|$180,001 and over||45%||$54,097 plus 45% of amounts over $180,000|
Discount on capital gains when you hold for more than 1 year
In Australia, even capital gains are taxed at your marignal income tax bracket and form part of your assessable income. There is no special tax rate for CGT.
However if you hold your crypto for at least one year then you can get a 50% discount on the capital gains.
Justin, an Australian resident, he buys 1 BTC for $5000 in 2018.
He sells it 14 months later in August 2018 for a total of $6000.
His capital gain is therefore: 6000 - 5000 = $1000.
Assuming an income of $20,000 during the year. his tax bracket would be 19%. However, since he sold the crypto after holding it for one year, he can get a discount so he only needs to declare a capital gain of $500.
Calculating your crypto taxes (example)
Let's look at how capital gains are calculated by way of an example.
- John bought 1 BTC for $1000 on 1st July 2020.
- He traded it for 20 ETH on 5th July 2020. The market value of 20 ETH at this point was $1500.
- He also received 0.15 ETH (worth $10) from Coinbase as a signup bonus.
To calculate the crypto taxes for John we are going to use Koinly which is a free online crypto tax calculator.
After entering the 3 transactions into Koinly manually, this is the output:
We can see the gain/loss on each transaction clearly. Navigating to the Tax Reports page also shows us the total capital gains.
As you can see, John will have a taxable capital gain of $500 along with taxable income of $10 from cryptocurrencies.
The good thing about crypto tax software is that whether you have 10 transactions or 10,000 - it is equally easy to generate your tax reports! You can sign up for a free account on Koinly and view your capital gains in a matter of minutes.
Accounting methods used in the calculations
The ATO requires you to use FIFO when calculating your crypto taxes. To understand how FIFO works in depth, check out this article.
Minimizing Your Tax Liability
Deducting Cryptocurrency Losses & Trading Fees
The first step towards minimizing your tax liability is figuring out what losses and expenses you can offset against your taxable income. In order to do this, you first need to figure out whether you will be classified as someone who holds crypto as an investment or whether you're carrying on a crypto trading business.
Crypto trading or cryptocurrency used in business
In this case, you can completely offset your crypto losses against your income, as long as you pass the non-commercial losses rules. Also keep in mind, that the crypto you own at the end of the year is your trading stock and you have to declare it's value as part of your assessable income. Interestingly, you can declare this either at cost or market value, which gives you some flexibility in terms of tax planning.
Buying crypto only to pay for something else / Personal use asset
You can get an exemption from capital gains tax if you hold cryptocurrency as a personal use asset. If you purchase no more than AU$10000 of cryptocurrency to directly buy something else with crypto, that too over a short time period, you're eligible for this exemption.
When the crypto is acquired and held for some time before any such transactions are made, or if only a small portion of the crypto is used to make some transactions, it's unlikely that the crypto is a personal use asset. A cryptocurrency is unlikely to be a personal use asset in the following situations:
- When you have to exchange the crypto to Austrian dollars or some other cryptocurrency to purchase the items for personal consumption, or
- If you have to use a payment gateway or other payment intermediary to acquire the items on your behalf (as opposed to using crypto directly)
The time of disposal of the crypto is the key to working out if it's a personal use asset. The longer the crypto is held, it's unlikely to be a personal use asset — even if you ultimately use it to purchase items for personal consumption. This is because you have likely benefited from an increase in the value of the crypto during the holding period.
So use this provision with care. If you end up getting investigated by the ATO, the burden of proof is on you to show that the crypto was, in fact, a personal use asset. Also, all capital losses you make on personal use assets cannot be written off against capital gains at any point.
Hacked or stolen cryptocurrency
If your cryptocurrency gets stolen or if you lose your private key, you can claim a capital loss. However, in order to claim this capital loss, you need to be able to provide certain evidence. This includes:
- The wallet address that the key belongs to
- When you acquired the key and when you lost it
- The cost of acquiring the stolen/lost cryptocurrency
- The fact that the wallet was controlled by you
- The amount of cryptocurrency at the time that you lost the key
- That you possess the hardware where the wallet is stored
- The transactions to the wallet from an exchange which is linked to your identity
Deducting cryptocurrency mining expenses
This depends on whether you undertake mining as a business or a hobby; this can be done by looking through the Are-you-in-business section on the ATO website.
Mining as a business
Any expenses related to mining — including electricity costs — can be deducted from your income to find your net taxable income. Moreover, the cost of capital assets, including both hardware and software, can be depreciated over their effective life. If eligible, you may also be able to apply the $20000 instant asset write off to the cost of the capital assets.
Mining as a hobby
If you've undertaken crypto mining as a hobby, the mined bitcoin constitutes holding a CGT asset and you would be subject to capital gains tax on disposal of the crypto. This means that no deductions are allowable. It's also important to remember that personal use asset exemption rules don't apply to the capital gains made on disposal of mined cryptocurrency.
How do I file my crypto taxes?
THe easiest way to file your taxes is using myTax but you also have the option of declaring them on paper.
Both capital gains and Income go on the same tax return.
Tax returns for individuals 2020
WHO NEEDS TO FILE THIS?
Anyone who has earnt income or made capital gains (not just from crypto).
WHAT INFORMATION IS NEEDED?
This form requires you to enter all your income tax information.
What if I don't file my cryptocurrency taxes?
The ATO is focused on ensuring all taxpayers meet their tax obligations. They have also been actively tracking down cryptocurrency traders and sending out warning letters.
If you’re not sure whether you’ve correctly reported your crypto taxes over previous years, it’s best to be proactive and amend your previous tax reports.
Bonus: Use cryptocurrency tax software to automate your reports
While the task of preparing your crypto taxes can seem quite daunting - especially if you traded on multiple exchanges - there are tools like Koinly which can make your life really easy.
Here's how it works with Koinly so you can see for yourself:
Step 1: Connect your exchanges and wallets
Most exchanges have API's that can allow Koinly to download your transaction history automatically. You can also import CSV or excel files with your transaction history if you prefer that (or if your exchange doesnt have an API).
Step 2: Preview your capital gains
Koinly does a number of things under the hood in order to calculate your capital gains and income.
First it fetches the market rates at the time of your trades, then it matches transfers between your wallets and exchange accounts and finally it calculates your capital gains. You can easily configure the accounting method used for the gains (it supports FIFO, LIFO, HIFO, Spec ID and a number of other methods). The default in the US is FIFO.
All this is automated so the only thing you have to do is head over to the Tax Reports page to see a summary of your gains:
Note that you can also use the Dashboard to stay on top of your taxes as you carry out trades. This can help you make good tax-friendly trades and avoid surprises at tax time!
Step 3: Download your tax reports
The final step - if you can call it that - is to download your tax reports. The tax report you want is called the Complete Tax Report, it contains everything you need to report to the ATO.
When is the tax deadline?
The Australian tax year is from July 1 to June 30. So if you're paying taxes for the year 2017-18, you need to complete your tax returns by October 31, 2018. That's why it's important to have a handle on your crypto transactions through the year, as delays in filing your cryptocurrency taxes can lead to penalties and fees.
Do I have to pay Capital gains tax if I have already paid Income tax?
Yes, you do! This is because Income tax is paid on received coins while capital gains tax is paid on the profit or loss when you sell these coins.
If you mine 1 BTC (worth $1500) and later sell it for $2000, you would have to pay Income tax on $1500 and a capital gains tax on the $500 profit.