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What are the tax implications of your cryptocurrency investment?
The constant evolution and introduction of new types of cryptocurrencies makes it confusing – but even more important for investors to understand how Australian tax law applies and what you might owe the ATO come tax time.
Whether you’re new to crypto investing, or have been doing it for years, there’s a lot to consider. We’ve compiled a list of things to think about to help you:
- What's the ATO’s stance on paying tax on my crypto investment?
- I thought crypto was decentralised and didn’t need to be tracked or taxed?
- Am I an Investor or Trader? Why does that matter?
- What type of records should I be keeping?
- Is there a way to minimise the tax I pay on crypto investments?
It’s important to get tax advice specific to your situation, so if you have any questions about the nature of the general information in this article, please get in touch with your accountant or contact our team.
What's the ATO’s stance on paying tax on my crypto investment?
At the time of writing, the ATO has legislated that cryptocurrency is not treated as foreign currency for tax purposes – so all activities relating to cryptocurrency trading are going to be taxed either through capital gains tax (CGT) or income tax. The 50% Capital Gains Tax discount applies to investments held for 12 months or more. Which type of tax applies depends on whether you’re using crypto as an investor or trader (more on that later).
Tax law and how the ATO applies it to digital assets like crypto is constantly evolving, so make sure you’re staying on top of your current responsibilities. These transactions are more complex and it all operates in a peer-to-peer market, so it’s more volatile compared to traditional assets and you might end up with sizeable gains (on which you’ll have tax to pay) and losses (that you will still need to declare).
I thought crypto was decentralised and didn’t need to be tracked (or taxed)?
You might think that because cryptocurrency is a decentralised exchange (it doesn’t rely on a bank or centralised authority to transact), any transactions can be easily hidden. But the very nature of cryptocurrency means every step of every transaction is recorded on the publicly available blockchain ledger and accounted for – and trackable by anyone with the right knowledge or technology – including the ATO!
The ATO also has a data-matching program that can track and date back assets including shares, property, boats, artwork and cryptocurrency. As a digital asset, crypto requires software to interact and transact, particularly on chain transactions, making it even easier for the ATO to track than some physical assets.
Even as new decentralised cryptocurrencies emerge, the likelihood is that organisations like the ATO will continue to track transactions and use technology that calculates the tax owed on new crypto investments.
Am I an Investor or Trader? Why does that matter?
It’s important to determine if you’re classified as an investor or crypto trading business because it determines whether your taxed under CGT rules or income tax rules.
Investor |
Trader |
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You’re buying/selling crypto with the intention to earn income. If you own digital wallets containing different types of crypto, remember these are treated as separate CGT assets. As an investor, you need to report whenever a “CGT event” occurs, which includes:
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You’re mining, buying or selling crypto in an organised, strategic and business-like manner or plan. Your earnings are business income, which is subject to income tax. Income tax applies whenever you:
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What type of crypto investment records should I be keeping?
You need to keep records for all your cryptocurrency transactions – whether you’ve transacted in an Australian or foreign cryptocurrency exchange.
The ATO website outlines your record-keeping requirements, including anything from buying/acquiring crypto through a trade or Airdrop, your ownership of crypto and any costs associated with this, and disposing of crypto (including its sale, the transfer price, and/or using crypto in exchange for other items such as other assets or NFTs).
We recommend using software to monitor crypto exchanges, as this allows your crypto transactions to be reconciled into a Fiat-denominated ledger, which you can then share with your accountants and run tax report algorithms over. Investors making large numbers of trades require a Crypto Tax Calculator to calculate your capital gain or loss on crypto sold. The crypto tax calculator will also apply the required 50% CGT discount on investments held for more than 12 months.
Is there a way to minimise the tax I pay on crypto investments?
When using the crypto tax calculator you have the choice of different inventory methods to choose from that can result in a different taxable outcome and can minimise your tax payable. We recommend speaking to a tax professional to assess which method best supports your personal tax position.
These include:
- First in first out (FIFO)
- Last in first out (LIFO)
- Highest in First out (HIFO)
- Average Cost (AVCO)
- Least tax first out (LTFO)
About YOUtax
YOUtax is an award-winning digital accounting firm on a mission to make tax and financial wellness services easily accessible to everyone who needs it. We partner with organisations to provide time-poor employees across Australia with an easy-to-access and easy-to-understand Financial Wellness Program that includes education, tax planning and advisory services.
Winners of the 2021 Australian Accounting Awards Innovative Firm of the year and awarded Xero’s Innovative Partner of the Year for 2022.
