Tips for Reporting Income and Managing Your Tax Obligations
Cryptocurrencies can be bought and sold on online exchanges and can also be used to purchase goods and services from merchants who accept them as payment. However, the value of cryptocurrencies can be highly volatile and subject to market fluctuations, making them a high-risk investment. It is important to do thorough research and understand the risks before investing in cryptocurrencies.
In Australia, you generally need to pay tax on any profits you make from cryptocurrency investments. This is because The Australian Taxation Office (ATO) treats cryptocurrency as an asset for tax purposes, and any gains you make from buying and selling cryptocurrency are generally considered to be capital gains.
We advise clients to keep accurate records of all cryptocurrency transactions, including the date of purchase, the purchase price, the date of sale, the sale price, and any other relevant details. This will help us calculate your capital gains or losses accurately when preparing your tax return.
The sorts of records you should keep include:
- receipts of purchase or transfer of cryptocurrency;
- exchange records;
- records of agent, accountant, and legal costs;
- digital wallet records and keys;
- software costs related to managing your tax affairs.
Those who sell an asset – including property, shares, crypto, or NFTs – are required to calculate any capital gain or loss and record it on their annual tax return. The capital gains tax (CGT) is calculated based on the difference between the asset’s sale price and its purchase price.
If you hold cryptocurrency for more than 12 months, you may be eligible for the capital gains tax (CGT) discount, which means that only 50% of the capital gain is added to your assessable income for tax purposes. However, if you hold cryptocurrency as part of a business or as a sole trader, you may need to pay income tax on any profits you make.
Example 1:
John buys 1 Bitcoin for $10,000 AUD on January 1, 2022, and sells it for $15,000 AUD on March 1, 2023.
Calculation of CGT
Sale Price: $15,000
Purchase Price: $10,000
Capital Gain: $15,000 – $10,000 = $5,000
As John held the Bitcoin for more than 12 months (i.e., more than the CGT discount threshold), he is eligible for a 50% CGT discount.
CGT Discount: $5,000 x 50% = $2,500
Taxable Capital Gain: $5,000 – $2,500 = $2,500
John needs to include $2,500 as a taxable capital gain in his income tax return for the financial year in which the sale took place.
Example 2:
Sarah buys 10 Ethereum for $5,000 AUD each on July 1, 2021, and sells 5 Ethereum for $12,000 AUD each on December 1, 2022.
Calculation of CGT
Sale Price: $12,000 x 5 = $60,000
Purchase Price: $5,000 x 5 = $25,000
Capital Gain: $60,000 – $25,000 = $35,000
As Sarah held the Ethereum for less than 12 months, she is not eligible for the CGT discount.
Taxable Capital Gain: $35,000
Sarah needs to include $35,000 as a taxable capital gain in her income tax return for the financial year in which the sale took place.
It’s important to note that these examples are for illustrative purposes and do not take into consideration other factors such as deductions, offsets, and individual circumstances that may affect the final CGT calculation. It’s recommended to seek professional advice from a qualified accountant or tax professional to accurately calculate CGT and ensure compliance with Australian tax laws.
Whilst many think that only tracking gains is essential, losses are equally important. Losses can prove extremely useful in the future as they can be carried forward and act as a capital gain offset against future gains.
If you mine cryptocurrency as a business activity, the value of the cryptocurrency mined is considered assessable income and is subject to income tax. Deductions may also be claimed for expenses incurred in the mining process, such as electricity costs and equipment depreciation.
If you receive cryptocurrency as payment for goods or services, it’s treated as ordinary income at the time of receipt and subject to income tax based on the AUD value of the cryptocurrency at the time of the transaction.
Cryptocurrency is generally not considered as money or foreign currency for Goods and Services Tax (GST) purposes in Australia. However, GST may apply to certain transactions involving cryptocurrency, such as buying goods or services with cryptocurrency or exchanging cryptocurrency for Australian dollars.
As per ATO guidelines, if you buy, sell, or exchange cryptocurrency with a value of $10,000 AUD or more, you may have reporting obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act. This includes registering with AUSTRAC, verifying customer identities, and reporting certain transactions.
To ensure compliance with tax laws and regulations and maximise the value of your assets, seeking advice from an accountant is highly recommended. Our tailored solutions and expert advice can assist you in meeting your tax obligations, optimising the value of your digital assets, and ultimately creating wealth through smart investment strategies*. Don’t leave your cryptocurrency tax matters to chance – let us help you navigate the complexities of crypto taxation and create wealth.
*Disclaimer: We do not provide financial planning, investment management, or related services. Any mentions of these areas signify that they are outsourced to our network of licensed professionals. We strongly advise consulting a qualified licensed professional within our trusted network for personalised advice in financial planning, investment management, or related services.
