“Are you guys into crypto??” It was the question Kim Kardashian asked her 250 million followers. If you had followed Kim’s investment advice in June, it is likely you would have lost a large amount of your investment as Ethereum Max has declined by about 90 percent in the months following her Instagram post.
Having been plugged by everyone from DJ Khaled, Charli D’Amelio, Elon Musk and Floyd Mayweather – cryptocurrency (crypto) investment has definitely hit the mainstream.
However, if you’ve taken a recent interest in crypto investing, you are not alone – the ATO has too! Which means that, if you are one of the many investors who have dipped their toe into the crypto pool during the 2021 financial year, it’s worth understanding the tax implications of what you’ve bought and sold. Below are some tips to ensure that you’ve disclosed your crypto activity correctly.
Trader v Investor
The tax treatments for traders versus investors are different so it’s important to know which camp you fall into. It’s important to get the classification correct as there can be big differences in the amount of tax you pay, depending on how you are classified.
If you’ve purchased crypto as an investment, hoping that it will increase in value, you would generally be classified as an investor and the gains or losses you make when you sell are capital in nature.
However, if you are out there actively trading crypto, then the gains you make are treated as ordinary (business) income and any losses are business losses.
Not all scenarios will be black and white, but the main factors the ATO will look at when deciding if you are carrying on a business as a cryptocurrency trader are:
- Are you operating like a business? – Is there is a plan to your trading activities and are you putting in time on a regular basis?
- How much are you trading? – The greater volume of trades you make and the larger the value of those trades, the more likely it is that you will be determined to be running a business.
- What kind of profits are you expecting to make? – Is this a serious business venture or are you just having fun speculating on tips you got off TicTok?
- ABN and ATO registrations – whilst having these in place doesn’t automatically make you a ‘trader’, it does help prove you intend to make your trading a business.
Unfortunately, you don’t get to just choose which category you fall into, but it is based on a factual assessment of your circumstances. The threshold for being treated as a trader is a high one and most people who are buying and selling crypto will likely be treated as an investor, even if you buy and sell multiple times during the year.
Investor
The ATO classifies crypto (digital currency) as a capital gains tax asset in the same way as shares in a company or units in an Exchange Traded Fund (ETF). This means that any gains or losses you make on disposal of crypto are on capital account.
While a digital wallet can contain different types of cryptocurrencies, each cryptocurrency is a separate capital gains tax asset.
Each time you dispose of crypto, it is a capital gains tax event, which means that you need to calculate whether you made a gain or loss on the transaction. The most common disposal events are:
- Converting cryptocurrency to real currency, such as AUD
- Selling or gifting cryptocurrency
- Trading or exchanging one cryptocurrency for another
- Using cryptocurrency to purchase goods or services
What happens when I sell and make a gain?
If you got into Doge before Elon, and you sold it for more than the amount you paid to acquire it, congratulations! You have made a capital gain. In calculating the size of your gain you need to make sure you factor in any transaction costs.
When it comes time to do your tax, both the sale proceeds and acquisition costs need to be accounted for in Australian dollars. This means that if the purchase costs or sale proceeds were in an alternate currency, you will need to covert these back to Australian Dollars at the time of the transaction.
The good news is that if you’ve held crypto in a trust or in your own name for greater than 12 months, you may be entitled to reduce the capital gain by 50%.
What happens when I sell and make a loss?
If you followed Kim’s advice and bought into Ethereum Max at the top of the market then sold out for less than what you paid, you are likely now the proud owner of a capital loss. Fear not, the good news is that you can use capital losses to offset any gains you’ve made on other investments in that financial year. If your capital losses are larger than your capital gains, then the unused losses carry forward to offset against capital gains in future years. Unfortunately, you can’t use capital losses against your other income.
What if I haven’t sold out yet?
Merely having an asset that goes up or down in value does not create a tax event. It is only when you dispose of the asset that you make a capital gain or loss (and that’s when the ATO will want their share).
Trader
If you are classified as a crypto trader, then amounts received from the sale or exchange of cryptocurrency are treated as ordinary income.
The purchase of crypto is in line with the trading stock rules – effectively, you claim a deduction for the cost of the crypto purchases that you have disposed of during the year.
You can also claim a deduction for other costs you have incurred in running your crypto trading business (including but not limited to home office costs and professional development expenses).
Unlike crypto held on capital account, traders also have the ability to revalue their trading stock to market value at year end, which means that they can choose to take advantage of any unrealised losses in their portfolio as a tax planning strategy.
Where you make a profit from crypto trading through the financial year, this is added as part of your taxable income. Losses made in the course of cryptocurrency trading can be deducted against any other taxable income in your name (subject to passing the non-commercial loss rules).
What if I just want to use crypto to pay for stuff?
If you’re predominantly using crypto to purchase items for personal use or consumption then there may be scope to argue that this is what the ATO call a personal use asset. In this case, any capital gains or losses on your crypto are disregarded.
This is most commonly the case where small amounts of crypto are acquired (must be less than $10,000) and then used within a short period of time to genuinely purchase something for yourself.
Of course, this exemption won’t apply if you purchased the crypto as an investment, to make a profit, or if you did it in the course of carrying out your trading business. Additionally, any gains or losses are not disregarded where cryptocurrency has to be converted to AUD or exchanged to a different cryptocurrency to purchase the assets, or if a bill payment gateway is required to purchase the personal use assets.
The ATO are watching
It’s important to remember that the ATO has access to large amounts of data in relation to what crypto has been bought and sold throughout the year. If you’ve sold crypto throughout the year, the ATO will expect to see it disclosed on your tax return unless there is a good reason otherwise. The personal use asset exemption is very narrow and unlikely to apply to most people, and as such, if you are seeking to rely on this, make sure you have your paperwork in order.
Recordkeeping
Regardless of whether you fall under the category of investor or trader, you need to keep good records to support your trades.
The ATO require you to keep the following records (at a minimum):
- Transaction dates.
- The value of the cryptocurrency in AUD at the time of the transaction.
- Who the other party in the transaction was and what the transaction was for.
These records can be in the form of receipts of purchase, exchange records or digital wallet records. There are also a number of reporting services such as Koinly that can provide tax reporting to Australian taxpayers.
Plan for tax
There is a lot of money that has been made (and lost!) through trading crypto. If you’ve bought and sold, or are thinking of investing, it is worth discussing the tax consequences prior to doing so, to ensure that your tax affairs are structured correctly.
By Elissa Lippiatt, Chartered Accountant and Director