How can Australians calculate their crypto tax liability?

Many crypto investors in Australia could soon face a hefty tax bill after a banner year for cryptocurrencies in 2021. According to estimates by the Australian Taxation Office (ATO), between 500,000 and 1 million Australians own cryptocurrencies.

In March 2020, the ATO announced its intention to target and audit crypto traders. He sent up to 350,000 letters to individual crypto traders reminding them of their tax obligations. Many crypto investors are now wondering what their tax obligations are. In this article, we have answered the most common questions about crypto taxes from Australians.

ATO classifies cryptos as property

In Australia, cryptocurrency is neither considered the Australian dollar nor another fiat currency. From a tax perspective, the ATO considers cryptocurrencies to be a “property”, which is subject to capital gains tax (CGT).

Which crypto transactions are taxable?

According to the ATO website, CGT liability can arise when you dispose of your cryptocurrency. Here, elimination does not always mean selling a cryptocurrency. It can also include donating cryptocurrency, trading or exchanging one cryptocurrency for another cryptocurrency. Any time you convert cryptocurrency into fiat currency such as Australian dollars or use cryptocurrency to purchase goods or services, it will also be considered disposal.

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If a capital gain arises on the disposal of cryptocurrency, then all or part of the capital gain may be taxed. However, capital gains/losses from the disposal of cryptocurrencies that are personal-use assets are excluded when calculating your tax liability.

It is worth mentioning here that if disposing of crypto is part of your regular business, the profits from this transaction will be assessed as ordinary income and not as a capital gain. Another thing to note here is that each cryptocurrency held in a digital wallet is considered a separate CGT asset for tax purposes.

Investor vs Trader

Your crypto tax liability will depend on your status as a cryptocurrency trader or investor. While investors are subject to the CGT, traders are those who carry out a gainful activity or a business that generates ordinary income.

Who will fall under the “investor” category?

Despite the fact that you regularly trade cryptocurrencies, you are most likely to fall into the investor category. If you trade cryptocurrencies as part of your personal investment and a large part of your income is long-term earnings, you will most likely fall into the “investor” category.

As an investor, your gains/losses on crypto-currencies are subject to CGT.

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When will you belong to the “trader” category?

From a tax perspective, merchants are individuals or companies that conduct business involving cryptocurrencies. The factors that will be taken into account by the ATO to decide whether you belong to the category of “Trader” are:

  • That you are operating for business reasons and in a commercially viable manner
  • If you manage the business in a professional manner – for example, by preparing business plans, acquiring fixed assets or inventory in accordance with the business plan
  • Preparation and maintenance of accounting records and promotion of your business

In addition to the three factors mentioned above, factors such as your professional qualification, hours spent on the business, sophistication and scale of business are likely to be considered by the ATO before deciding if you can be classified as a trader.

If an individual has more than one activity, it may happen that one is considered as an investment activity and another/others as a commercial activity. It should be mentioned here that the tax treatment of each activity will be based on the objective assessment of the circumstances and facts.

If your income comes from several sources, it is very likely that disputes will arise over the nature of the income. It is therefore essential to clearly separate and document each activity. If there is any confusion regarding your self-assessment of tax liability, consult a tax advisor with specialist knowledge of cryptocurrency.

Different Types of Capital Gains Taxes

Capital gains tax arises after the disposal of capital property. However, taxpayers are eligible for a reduction based on the holding period of the asset. For example, if you hold an asset for more than 12 months, you can benefit from a 50% reduction on the CGT. For compliant super funds, this discount is 33.33%, while for individual taxpayers, this discount is 50%. Let’s understand this with an example.

Mr. A bought a bitcoin at $10,000 and sold it after 18 months at $25,000. In this case, Mr. A’s capital gains for tax purposes will be $7,500 (50% of ($25,000 – $10,000)), not $15,000.

Capital losses

If you sell your crypto assets for less than the actual purchase price of that asset, the capital loss will occur. This capital loss can be used to offset capital gains.

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How to file your capital gains tax with the ATO

It should be mentioned here that capital gains tax is not paid separately from your income tax. Your net capital gains (capital gains adjusted for capital losses and CGT discount) are added to your other taxable income such as wages, interest and dividend income for the year during which you sold the crypto asset. For example, your wage income for the year is AU$60,000 and you have net capital gains of AU$10,000 from crypto trading, then your total income for the year would be considered AU$70,000 . In this case, your tax payable will be calculated as follows:

  • 0% income tax up to AU$18,200
  • 19% tax on income between AU$18,201 and AU$45,000, i.e. AU$5,092
  • 5% tax on income from AU$45,001 to AU$70,000, which equals AU$8,125 in this case

The total income tax will be AU$5,092 + AU$8,125 = AU$13,217. In addition, the 2% Medicare tax on income of AU$70,000 is AU$1,400. So your total tax payable for the year will be AU$13,217 + AU$1,400 = AU$14,617.

It should be mentioned here that your final tax amount will change if you claim other tax deductions and tax offsets. The TDS amount that has already been deducted from your salary will reduce your net tax payable.

In addition to cryptocurrency gains from personal-use assets, the majority of gains/losses from cryptocurrency transactions are taxable. So it’s best to be prepared and show it on your tax return. If you are looking for more information on the taxation of crypto assets, it is advisable to visit the ATO website for more details.

Watch: A Guide to Cryptocurrency Tax in Australia with H&R Block

Risk Disclosure: Trading cryptocurrencies involves high risks, including the risk of losing some or all of the amount of your investment, and may not be suitable for all investors. Cryptocurrency prices are extremely volatile and can be affected by external factors such as financial, regulatory or political events. The laws that apply to crypto products (and how a particular crypto product is regulated) may change. Before deciding to trade financial instruments or cryptocurrencies, you should be fully informed of the risks and costs associated with trading in the financial markets, carefully consider your investment objectives, level of experience and appetite for the risk, and seek professional advice if necessary. Kalkine Media cannot represent and does not warrant that the information/data available here is accurate, reliable, current, complete, or appropriate for your purposes. Kalkine Media declines all responsibility for any loss or damage resulting from your interactions or your reliance on the information shared on this website.

Esther L. Steinbach