Cryptocurrency has grown exponentially in popularity over the last decade, attracting both seasoned investors and newcomers. Along with this rise in adoption comes an important question for many: do you only pay tax on cryptocurrency when you cash out? This blog explores the tax implications of cryptocurrency transactions in Australia.
Understanding Cryptocurrency and Tax in Australia
In Australia, the Australian Taxation Office (ATO) treats cryptocurrency as a type of property or asset, not as a currency. This means crypto transactions are subject to capital gains tax (CGT) or income tax, depending on the nature of the transaction.
When Do You Pay Tax on Crypto?
Tax obligations don’t only arise when you cash out your cryptocurrency into fiat currency. Here are the key events that may trigger a tax liability:
- Selling Cryptocurrency for Fiat Currency
When you exchange your cryptocurrency for Australian dollars (or any other fiat currency), this is considered a disposal of an asset. If the value of your cryptocurrency has increased since you acquired it, the profit you make will generally be subject to CGT.
- Trading Cryptocurrency for Another Cryptocurrency
Many assume that swapping one crypto for another (e.g., Bitcoin for Ethereum) doesn’t trigger a tax event, but in Australia, it does. The ATO considers this a disposal of one asset and an acquisition of another, making it a taxable event. As an example, suppose you buy bitcoin for $30,000 AUD and then swap it for Ethereum when the bitcoin is $50,000 AUD. In this example, you will pay tax on $20,000 AUD ($50,000 less $30,000 equals $20,000). The tax will be paid when you prepare your tax return for that financial year.
- Using Cryptocurrency to Pay for Goods or Services
If you use cryptocurrency to purchase goods or services, the ATO treats this as a disposal. You will need to calculate the capital gain or loss by comparing the value of the cryptocurrency at the time of acquisition with its value at the time that you purchase the good or service. Again, suppose you buy bitcoin for $40,000 AUD and then use all of that bitcoin to buy a $150,000 car when the bitcoin is $150,000 AUD. This means that you have made a $110,000 AUD gain ($150,000 less $40,000 equals $110,000). You will need to pay tax on the $110,000 – you declare this income in the same financial year that you used the bitcoin to purchase the car. Please consult your tax accountant Melbourne if you need further clarification.
- Earning Cryptocurrency
If you receive cryptocurrency as payment for goods, services, or as a result of mining, staking, or airdrops, this is considered taxable income. The value of the cryptocurrency at the time you receive it will be included in your tax return as assessable income.
How is Cryptocurrency Tax Calculated?
For each taxable event, the following calculations apply:
- Capital Gains Tax (CGT):
- If you hold cryptocurrency as an investment, CGT applies when you dispose of it. The capital gain is calculated as the difference between the asset’s cost base (the amount you paid for it, including fees) and its sale price. For example, suppose you purchased 1 Bitcoin for $80,000 AUD and then suppose that you sold that bitcoin for $170,000 AUD. In this example, you have made a $90,000 capital gain ($170,000 less $80,000 = $90,000). If you held the bitcoin for longer than 12 months, then you will receive the 50% CGT discount meaning that you will pay CGT on $45,000 ($90,000 x 50% = $45,000). The tax rate on CGT depends on your other income, but suppose that your tax rate is 30%. This means that, in this example, you will pay $13,500 ($45,000 x 30% = $13,500) in tax on the sale of the bitcoin. Please note that if you do need clarification of the above or anything in this blog, please contact your tax accountant Melbourne to have your questions answered.
- As mentioned above, if you hold the cryptocurrency for more than 12 months, you may be eligible for a 50% CGT discount.
2. Income Tax:
- If you earn cryptocurrency through mining, staking, or as a business, the value of the cryptocurrency is treated as ordinary income and taxed at your marginal tax rate.
What About Personal Use Exemption?
The ATO provides a personal use exemption for cryptocurrency, but it only applies in limited circumstances. To qualify, the cryptocurrency must:
- Be acquired and used solely for purchasing goods or services for personal use.
- Have minimal time between acquisition and use.
Cryptocurrency held as an investment, even for a short period, is not considered for personal use and is therefore subject to tax. This area can be a grey area – it is important to prove to the ATO that the cryptocurrency was used to transact because it was practical to do so and with no intention to make and profit from holding the cryptocurrency. Please contact your tax accountant Melbourne, like Nobel Thomas, who will be able to discuss your example.
Record Keeping is Essential
To comply with tax laws, you must maintain detailed records of all cryptocurrency transactions, including:
- Date of the transaction.
- Type of cryptocurrency.
- Value in Australian dollars at the time of the transaction.
- Purpose of the transaction.
- Relevant receipts or invoices.
Using crypto tax software (like Koinly) or working with an accountant Melbourne can help you manage and report your transactions accurately.
How to Minimise Your Crypto Tax Liability
- Hold for Over 12 Months: Take advantage of the CGT discount by holding your cryptocurrency for more than 12 months before selling.
- Offset Losses: If you incur a capital loss, you can use it to offset capital gains from other investments, reducing your tax liability. For example, suppose you have just sold some shares making a $20,000 capital loss (e.g. buy some shares for $35,000 and sell the same shares later for $15,000). If you also hold Bitcoin (and sitting on a paper gain of $30,000 AUD), then by selling that Bitcoin, you are only likely to pay tax on $10,000 AUD of the Bitcoin sale ($30,000 less $20,000 = $10,000). And furthermore, if you have held the Bitcoin for longer than 12 months then you are also likely to receive the 50% CGT discount, meaning that you only pay CGT on $5,000 AUD ($10,000 x 50% = $5,000).
- Seek Professional Advice: Cryptocurrency tax laws can be complex and ever-changing. Consulting a tax accountant Melbourne ensures you remain compliant while optimising your tax outcomes.
Final Thoughts
In Australia, you don’t only pay tax on cryptocurrency when you cash out into fiat currency. Taxable events include trading crypto, using it to pay for goods or services, and earning it as income. Understanding your tax obligations and keeping accurate records is key to managing your cryptocurrency portfolio responsibly. For personalised advice, always consult an accountant Melbourne. Please don’t hesitate to reach out to us now with your questions.
