Cryptocurrency and capital gains tax: your complete guide

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Cryptocurrency has been the financial ‘hot ticket’ of the last few years, experiencing explosive growth (and periodic crashes).

It’s been possible to make (and lose) substantial sums of money over startlingly short time periods, but few people stop to consider the tax implications.

In this article:

Here’s what you need to know about tax and cryptocurrency.

How crypto is taxed

If you buy cryptocurrency as an investment, capital gains tax (CGT) will apply.

This is calculated based on the difference between the amount you paid for the cryptocurrency and the amount you disposed of it for.

Any profit is subject to CGT, which can potentially be discounted by 50% if you hold your crypto asset for more than 12 months.

Disposal occurs when:

  • Selling cryptocurrency for Australian dollars;
  • exchanging one cryptocurrency for another;
  • gifting cryptocurrency;
  • trading cryptocurrency; or
  • using cryptocurrency to pay for goods or services.

In some cases, such as when you gift it, market value is substituted for proceeds.

Be careful though – CGT is not always relevant. Suppose you are acquiring the cryptocurrency to trade it. In that case, you might be deemed to be running a business of trading cryptocurrency, in which case you will pay income tax on the business profits (which is likely less advantageous than CGT, because the 50% CGT discount cannot apply).

Investor vs trader: the tax differences

If you buy and sell cryptocurrency on a regular basis with a view to making a profit, then the profits on disposal of the cryptocurrency will not be subject to CGT but will be subject to income tax since you will be regarded as a trader rather than an investor.

It can be a fine line between being an investor and a trader. Broadly speaking if you are turning over your cryptocurrency every few days chasing profits, you have many transactions and you are running a business-like structure (with for example a business plan, accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number) you will be a trader.

If you are holding the cryptocurrency with a view to long-term gain, you are likely to be an investor.

Where you are in the business of mining cryptocurrency, any income that you make from the transfer of the mined currency to someone else is subject to income tax.

How to record crypto transactions on your tax return

The ATO matches data that it receives from Australian cryptocurrency designated service providers (DSP’s) against its own records to identify individuals who may not be meeting their tax obligations.

If what you disclose to the ATO on your tax return doesn’t match the data the ATO has received from DSP’s, you can expect at the very least a “please explain” letter. This makes it much harder to hide behind the anonymity that previously was one of the hallmarks of cryptocurrency.

Make sure you keep the following records in relation to your cryptocurrency transactions:

  • The date of the transactions;
  • the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange); and
  • what the transaction was for and who the other party was (even if it’s just their cryptocurrency address);

The sorts of records you should keep include:

  • Receipts of purchase or transfer of cryptocurrency;
  • exchange records;
  • records of agent, accountants and legal costs;
  • digital wallet records and keys; and
  • software costs related to managing your tax affairs.

Always declare your cryptocurrency transactions on your tax return, either at the CGT schedules or the business schedules. Speak to a tax accountant with experience of cryptocurrency if you’re not sure how to do this or if you just need general advice. H&R Block (NYSE:HRB) partners with CryptoTaxCalculator and therefore we understand the tax risks associated with crypto, and how to avoid or deal with them.

Can I use the personal use exemption to avoid tax?

Some taxpayers mistakenly think that you can buy up to $10,000 of cryptocurrency and avoid CGT by taking advantage of the ‘personal use exemption’.

You can only apply this exemption where the cost of the cryptocurrency does not exceed $10,000 and you can demonstrate that the cryptocurrency was to fund genuine personal consumption, such as paying for a holiday, a car, your wedding, etc. Mistakenly relying on this exemption is one of the biggest reasons people fall foul of the ATO; expect to be asked to provide proof that you either did – or intended to – use your cryptocurrency to fund personal spending on goods and services.

Where the cost of your cryptocurrency assets exceeds $10,000, the personal use exemption will not be available and CGT will apply, whether the asset was for your personal use or not.

Mark Chapman is the director of tax communications at H&R Block. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales.