Australians have embraced cryptocurrencies in large numbers over the past few years, and it’s increasingly popular as an investment option, or as a means of carrying out anonymous, secure transactions.
Because the crypto market has grown so much, there are a lot of people out there who actively make a living from trading. And whenever money is being made, the tax office is on hand to take its cut.
If you’ve dabbled in crypto and you’re a resident of Australia, it’s important to get to grips with your tax obligations so that you don’t fall foul of the ATO.
So let’s take a gander at the main things to know about paying taxes on crypto, and what options you have in terms of tax efficiency on this type of asset.
The ATO’s Approach To Crypto Explained
As outlined in this crypto tax guide Australia has similar rules to other nations when it comes to levying a tax against crypto gains.
In this case, capital gains tax rules apply, because the ATO distinguishes crypto from fiat currencies by defining it as property.
It’s essentially dealt with like any other asset in this class, meaning that if you own crypto and then sell it for a profit, the difference between the original purchase price and the eventual sales price is taxable.
The good news is that just as profits from buying and selling crypto must be declared, so too are any losses that occur. This means that if your investing efforts don’t pan out as intended, with one coin dipping below what you paid for it, you can offset this against any gains you make elsewhere in your portfolio.
Capital Gains Tax Rates Explored
In some countries, capital gains tax is applied as a flat rate to any profit generated by assets owned by an individual taxpayer.
However, Australia doesn’t deal with this in quite the same way; instead, any capital gains are added to your total income for a given year, and tax is applied to this as a total.
The same goes for the aforementioned capital losses which you may suffer, and given the instability in the crypto market at the moment, this could be more common than in previous years.
Another factor to take on board is that the proportion of your capital gains that are taxed will depend on the length of time over which you held the asset. If you’ve owned a particular cryptocurrency for more than 12 months, you’ll only need to be taxed on 50% of the gains you make.
For example, if you bought Bitcoin at $20,000 and sold it at $30,000 over a year later, you’d only need to be taxed on $5,000 of the $10,000 total gain that you realized from this transaction.
This is basically a means of incentivizing long-term investment, rather than prioritizing the riskier business of short-term trading.
Data Collection Unpacked
While crypto is heralded for its decentralized nature and its comparative anonymity, that doesn’t mean it is completely shielded from the oversight of the tax authorities in Australia. Indeed providers of crypto services, such as exchanges and brokerages, have been required to provide records to the ATO since 2019 so that the regulator is up to speed with the activities of users.
The underlying message here is that you cannot afford to ignore the need to report your crypto gains and losses when filing your tax return. If you don’t you will eventually come under the scrutiny of tax officials, and the fallout from this could be serious.
Understanding When Gains Become Taxable
We already mentioned that there are incentives for those who buy and hold crypto from a tax perspective, but what exactly triggers the application of capital gains tax to your trading activities?
Well, the most obvious example is when you sell your crypto in order to realize gains and, in doing so, convert it back into fiat currency. This will usually mean receiving Aussie dollars for your crypto, but the rules still apply even if you pick a different fiat currency, whether that’s USD, GBP, or anything else.
Crucially, you’ll also need to pay tax if you buy one crypto and then trade or exchange it for another. Let’s say you picked up a meme-coin like Doge or Shiba, and then later decided that you’d ridden that wave long enough, and chose to swap to a more mainstream alternative like Ethereum.
By doing this, your crypto activities become taxable, so if you made a gain on your original purchase then this has to be added to your taxable income for the year, or if you made a loss this can be offset to reduce your tax burden.
You’ll also be expected to pay capital gains tax if you make a purchase with the crypto you’ve accumulated, although this type of transaction may also be exempt in the case that it falls under the definition of a personal use asset.
For example, if you purchase crypto and then use it on the same day to purchase goods or services because a specific business offers an incentive to do this, it will be exempt from capital gains tax. This is because there was no attempt to trade, invest or otherwise make money from the asset.
Appreciating The Long Term Advantages Of Crypto Investment
Until you dispose of a taxable asset, there’s no need to pay the piper on any increase in value that it has attained in the time since you purchased it. It could even be a good way to achieve financial independence.
For crypto holders in Australia, this makes it a savvier move to select a currency that you have confidence in as a long-term investment, and buy it with a view to keeping it in your wallet for years, rather than for a few days or weeks.
The upshot of this trend is that retirement investment funds are starting to move over to crypto, both because of the promise of massive gains over the lifetime of a fund, but also because of the opportunity to completely negate capital gains tax if the assets are sold when the fund reaches maturity.
Like other retirement-focused investments, crypto gains do not need to be taxed in the case that they are held for this reason and meet the remit of the ATO’s retirement fund regulations.
The Bottom Line
For most crypto fans in Australia, paying tax is a reality of getting into this fast-moving market. Rather than risking repercussions from failing to report gains, working with an accountant to file accurate tax returns each year is advisable.