When Bitcoin launched the cryptocurrency economy over a decade ago, crypto enthusiasts claimed digital currencies would usher in a new era of digital economy, free from the monitoring and regulations that dominate the traditional financial system and the intermediaries that enforce them.
Today, digital crypto markets constitute the bedrock of flourishing digital economies but success brings its own share of troubles as well: crypto markets have become too promising and profitable to ignore for investors and authorities alike. Policymakers around the world are busy devising new regulations to regulate and monitor the emerging cryptocurrency economy, including tax regulations.
While many countries don’t have specific policies for virtual currencies yet, that doesn’t mean cryptocurrencies are exempt from taxation. In many parts of the world, including the US and Australia, cryptocurrencies are considered economic assets with tax liabilities. That means buying, selling, or even owning crypto assets can incur taxes and failure to report taxes on your cryptocurrency transactions can get you in serious trouble with the authorities.
Luckily, we’ve prepared a detailed guide that will help you understand how crypto taxes work and how you can report your taxes accurately to the relevant authorities.
Which Taxes Apply to Bitcoin and Other Cryptocurrencies?
Cryptocurrencies like Bitcoin are not considered real currencies or legal tender by most countries (with the exception of El Salvador), at least not yet. In Australia and the US, cryptocurrencies are generally overseen and taxed as assets that have economic value, much like stocks or other properties. Policy makers are working on developing new frameworks that can adequately address the nature of crypto assets, but cryptocurrency transactions are taxed just like these other assets for now.
In Australia, most cryptocurrency transactions including gifting, selling, and trading cryptocurrencies incur a capital gains tax. Exchanging or swapping a cryptocurrency for another crypto asset, converting a digital currency to fiat currency (like US dollars or Euro) and using cryptocurrency to pay for goods and services are also taxed.
Basically, if you dispose of the cryptocurrency you have and make a profit and/or capital gains from your transaction, you might have to pay taxes. However, if you have a crypto-related business and you are disposing with cryptocurrency through your business, that will be taxed as income rather than capital gain.
In general, cryptocurrencies are considered capital gains assets and taxed accordingly. However, tax liabilities vary depending on the type of cryptocurrency you have and the kind of transactions you execute. We will go over different scenarios one by one so you know exactly what you have to report to file your crypto taxes, but first, let’s start by answering a very important question: Do you really have to report taxes?
Do You Really Have to Report Crypto Taxes?
Australia has designated cryptocurrency service providers i.e cryptocurrency exchanges that work with Australian authorities. Many US-based crypto exchanges are also registered with the Australian Tax Office (ATO) along with the Internal Revenue Service (IRS), so authorities are most likely aware of your cryptocurrency assets.
Since you need to provide KYC information when you buy crypto assets from crypto exchanges, the ATO can link your identity to your cryptocurrency purchases. The ATO not only has all the recent information from cryptocurrency exchanges but they keep transaction information regarding past years as well, as far back as 2014.
As a result, failure to declare cryptocurrency assets in your tax records can result in tax evasion penalties and charges. The ATO regularly issues warnings and reminders to cryptocurrency holders to report their capital gains from cryptocurrency assets. The ATO even asks crypto holders to review their taxes from previous years. Failure to declare your cryptocurrency gains can lead to even higher penalties, including interest on the original tax as well as 75% tax liability.
Filing cryptocurrency taxes may seem unnecessary and too complicated but it is an important responsibility. Taxpayers are expected to file crypto tax returns just like they file any other asset gains they make in a year.
What Is a Capital Gains Tax?
Capital gains tax, or CGT for short, applies to most cryptocurrency transactions that refer to investments. If you are not running a cryptocurrency business, and instead invest in cryptocurrencies as a way of building wealth similarly to buying stocks, then you are considered a crypto investor who is seeking to make a profit from long-term capital gains.
If you are running a crypto business such as a large-scale cryptocurrency mining operation, paying your workers in cryptocurrency, engaging in selling cryptocurrency as part of your business and so on, you are considered a cryptocurrency business and you pay income taxes related to your business.
Most crypto users are investors and they generally pay CGT on their crypto transactions. Investors can take advantage of capital gains tax discounts whereas traders and crypto businesses can’t.
Capital gains tax usually applies for capital gains (or losses) you make when you dispose of a cryptocurrency asset by selling, exchanging, gifting or using it to pay for goods and services. You pay a certain percentage out of your capital gains as capital gains tax. The exact rate depends on your total income and it is the same as your income tax rate. You have to check your individual income tax rate to see how much your CGT costs after your gains and losses in a tax year.
Understanding Capital Gains and Capital Losses
In order to understand how to report your capital gains, you have to understand how they’re calculated. Basically, a capital gain occurs when your initial investment gains more value with time. So if you buy Bitcoin today, and its price doubles tomorrow leading you to sell your asset, the difference between the buying and selling price is your capital gain. If you earn more than what you initially paid (the cost base) you are making capital gains. If you earn less than what you initially paid for the asset, you are making a capital loss.
Calculating the cost base is easy. You simply add any additional fees like transfer fees and commission fees to the value of the cryptocurrency at the time you bought it.
For example, let’s say you buy 100 Australian dollars worth of BTC in January and pay 10 Australian dollars in fees. Your cost base would be $110. In April, Bitcoin’s price goes up and you sell your BTC for $200, plus a $10 commission fee. When you take into account the fees, your profit equals 80 Australian dollars that will incur a capital gains tax, depending on your income tax rate.
If you had waited until January next year to sell your coins, instead of selling them in April, you would have paid less in capital gain tax because holding onto a crypto asset for more than a year entitles you to a 50% discount.
Moreover, since you don’t make gains or losses until you actually sell your cryptocurrency, market price changes don’t matter until you finally dispose of your crypto asset.
If you are at a loss once you dispose of your cryptocurrency, then you can deduct the loss from your asset gains. You can also carry over the losses to future years. However, you can’t deduct a capital net loss from your income because losses can only be deducted from other asset gains you have made from other capital assets like property, stocks, or crypto.
Types of Crypto Taxes
Crypto to Crypto Transaction Taxes
When you exchange one type of cryptocurrency with another cryptocurrency, you are essentially exchanging one property for another. These assets are considered capital gains tax (CGT) assets and incur CGT for every transaction. In order to calculate the taxes on such a transaction, you need to know the market value of the digital asset you’ve exchanged and/or received at the time when the transaction was made.
If you don’t know the market value of the asset you’ve received, the market value of the asset you’ve exchanged can be used to calculate the capital gains tax.
For example, let’s say you bought 10 BTC for $1,000 and later on, exchanged 5 BTC for 50 ETH on a cryptocurrency exchange. In order to find out how much your capital gain is, we have to look at the price of ETH at the time you made your purchase. The market value of 50 ETH at the time of the exchange equals your capital proceeds.
Converting Cryptocurrency to Fiat Money
When you sell cryptocurrency for fiat currency, the profits you make incur a capital gains tax. If you purchase Bitcoin for 1,000 Australian dollars and sell it for 1,500 Australian dollars, your capital gain is 500 Australian dollars.
Giving Crypto as a Gift
In Australia, giving or gifting cryptocurrency attracts a capital gains tax. You have to pay CGT when you give your crypto to someone, much like when you are trading it. Capital proceeds are calculated according to how much you paid when you bought the cryptocurrency and how much it costs on the market on the day you gift it.
For example, if you buy 1 BTC for 1,000 AUD and give it to a friend when BTC prices reach 2,000 AUD, your proceeds are the difference between the two prices, i.e. 1,000 AUD. That means you have to pay CGT on that difference.
Receiving Cryptocurrency as a Gift
Again, receiving crypto is not a taxable event by itself. However, you pay a CGT when you dispose of your gifted cryptocurrency. The proceeds are calculated based on the price of the currency on the day you received it and its price at the time of your disposal.
Cryptocurrency Investment Taxes
If you have cryptocurrency investments, you can make capital gains from your crypto assets. Once you dispose of your investments, you might get capital proceeds from your investment if your investment makes a profit.
Basically, if you sell your cryptocurrency for a higher price than you initially paid, you get capital proceeds that count as a capital gain. If you hold a cryptocurrency investment for more than a year, you can take advantage of a CGT discount when you sell your investment.
If you don’t make a profit from your investment and sell it for less than the initial price, you might write it off as a net capital loss but it won’t be deducted from your overall income during the same tax year. Instead, you’ll be able to apply the net capital loss to reduce a capital gain in the next tax year. That means it is important to keep detailed records for all your crypto transactions.
Cryptocurrency Airdrop Taxes
Crypto assets you receive by the way of airdrops are taxed as income in Australia. If you receive cryptocurrency from an airdrop, that is considered an accessible income. You should know that both participant and involuntary airdrops are considered accessible income, so you should keep track of your crypto balances to make sure any random deposits are accounted for.
Taxes for airdrops depend on the price of the cryptocurrency at the time you’ve received it. If you receive 100 AUD worth of cryptocurrency through an airdrop, you have to report it as taxable income. That means you are taxed based on what you receive.
If you dispose of your airdropped crypto assets, you still have to report it as capital gain tax. If you receive 100 AUD worth of cryptocurrency through an airdrop and then sell those assets for 300 AUD, you’ll report a capital gain of 200 AUD.
It is important to remember that you have to pay a CGT once you dispose of your airdropped crypto assets even if you pay an income tax when you receive them. You pay an income tax based on the price of the asset on the day you received it and a capital gains tax based on the asset price when you sell it.
Crypto Taxes on Staking and Lending Masternodes and DeFi Interest
Rewards from staking and related activities (hobby mining or running a masternode for a blockchain) are counted as taxable income. Lending cryptocurrency to take advantage of yield programs and interest payments also count as ordinary income, and they have to be reported as such.
Basically, any crypto assets you receive from staking or airdrops and the profits you make through DeFi and yield programs incur income taxes.
Crypto Taxes Related to Forks and Chain-Splits
When there is a fork in cryptocurrency blockchains, new cryptocurrencies emerge if there are enough people on both sides of the fork. That means, whenever a chain-split or a fork happens, you get as many “forked coins” as you’ve originally had of the original cryptocurrency.
For example, when Bitcoin’s chain-split gave rise to Bitcoin Cash, Bitcoin holders received the same amount of Bitcoin Cash in their accounts. While this isn’t a taxable event by itself, it will be when people dispose of the cryptocurrency.
If you hold the new cryptocurrency as an investment in your portfolio, it will incur a capital gains tax. In order to calculate your capital gains with forked coins, you need to take the cost base as zero (as you don’t pay to receive these coins their cost counts as zero). If you hold on to the new cryptocurrency for more than 12 months, you can take advantage of a GTC discount of up to 50%.
It is important to remember that the new asset’s cost base will be zero even if its price surpasses the original cryptocurrency, as is the case with Ethereum and Ethereum Classic. Even though Ethereum Classic is the original Ethereum blockchain the price of ETC is much lower than ETH, which means you could be tempted to write your ETC as the zero-cost asset. However, since ETH came later, that is the real zero-cost asset.
If the original chain disappears after the fork and two new forks appear, you can write the original cryptocurrency as a capital loss. Unlike airdrops, cryptos you receive due to forks and chain-splits are not counted as income.
Crypto Taxes on Initial Coin Offerings and Initial Exchange Offerings
Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) are events where you invest in cryptocurrency projects before they officially launch. You can invest in an unreleased cryptocurrency project by investing in it through established cryptocurrencies such as BTC and ETH. These are taxed similarly to crypto to crypto trades. When you sell your new crypto assets, the cost base of the transaction is calculated on the basis of what you initially paid at the time of the ICO/IEO.
Cryptocurrency Taxes on Stablecoins
Stablecoins are treated as other crypto assets for tax purposes. You pay CGT on stablecoin transactions just like with other crypto assets.
Paying for Goods and Services with Long-Term Crypto Assets
If you are using long-held cryptocurrency to buy goods and services, your transactions attract a capital gains tax. If your transaction is worth more than 10,000 AUD, it attracts a CGT whether or not the funds are long-held crypto.
This can be a bit confusing but basically, this means that there is an official difference between personal use assets (using crypto for specific purchases) and simply using your crypto to pay for some stuff once in a while.
Your transactions are taxable if you are purchasing for investment and/or business purposes, and if you are using crypto you had for a long time for such purposes. That is because the longer you hold crypto, the more it counts as an investment that is considered taxable.
So for example, let’s say you keep crypto in your account for months, intending to sell it to make a profit when prices rise. One day you decide to make a purchase and pay for it using your crypto assets. Because the original intention was an investment, your transaction doesn’t count as personal asset use and your transaction is liable for CGT.
Personal Use Assets
There are some cases where you don’t have to report capital gains and losses when disposing of your cryptocurrency. If an asset is kept or used mainly for buying yourself things or services, then it can be considered a personal use asset. A cryptocurrency that is a personal use asset can be disregarded for CGT if it is worth less than 10,000 AUD. All capital losses are disregarded for personal use assets.
That said, determining if some crypto you have counted as a personal use asset can be hard. If you are holding crypto as an investment for profits or for a business you have, then your funds are definitely not for personal use and can’t be counted as such.
For cryptocurrency to be counted as personal use assets, it generally needs to be bought and spent in a short amount of time, in order to acquire goods and services for yourself. If you buy crypto and keep it in your account for a long time and only occasionally purchase things with it, tax officials may not think that it is a personal use asset and you have an investment portfolio.
According to ATO (Australian Tax Office), the cryptocurrency you convert into fiat currency in order to purchase goods and services doesn’t count as a personal use asset. If you are making a payment for goods and services through an intermediary payment service instead of purchasing it directly with crypto, you are again liable for taxes.
Moreover, the longer you hold cryptocurrency in your account, there is less chance that it is for personal use. For example, your favourite store is promoting cryptocurrency and gives a discount to all purchases with cryptocurrency. If you buy cryptocurrency then and there and immediately spend the coins to make a purchase from the store, that counts as a personal use asset.
Crypto Taxes on Hobby Mining
If you are participating in mining as a hobby and not as a business, you pay CGT on mining rewards you receive. In order to classify as a hobby miner, you need to run a small operation with a relatively small initial investment in mining technology. Tax rules differ greatly if you run a mining business, so make sure your operation counts as hobby mining.
What Happens If You Lose Your Cryptocurrency?
If your cryptocurrency is stolen or you lose access to your crypto assets because of a lost or compromised private key, you might be able to claim a capital loss on your funds.
However, you have to be able to prove that you previously owned the stolen/lost cryptocurrency and that you no longer have access to those funds. That means you might have to provide evidence to back up your claims.
The evidence can include the wallet address that belongs to the lost/stolen private key, a transaction that links your identity to the wallet address (for example through a cryptocurrency exchange with KYC checks), the amount of cryptocurrency that was in the wallet, the cost of acquiring that cryptocurrency and so on.
How Do You Report Your Crypto Taxes?
As you probably know, the tax year in Australia begins on July 1 and lasts until June 30 of the following year. Let’s say you are filing tax returns for the year between July 2021 and June 2022. This gives you two options – you can either file and lodge your own tax return by October 31, 2022, or have an accountant file it by March 31, 2023.
You have to report crypto taxes in your Annual Tax Return forms, the same way you report your regular income. Your crypto transactions should be reported either as income or capital gains, which means you need to calculate crypto tax totals. Once you have your calculations in the order you can file your tax return online or with printable forms. If you are going with the print option, you need to fill two separate forms for income and capital gains.
When you are calculating crypto tax totals you have to use a method approved by the ATO. If you are filing your own tax returns as an investor, you can use FIFO, LIFO and HIFO methods. If you are a trader or a business operator, you need to use FIFO to calculate income tax on your business.
If the process seems too daunting, don’t worry, there are third-party online services that can help you calculate your crypto taxes. As long as you keep good records of your crypto transactions, you can easily manage your taxes.
How to Keep Cryptocurrency Records for Taxes?
Keeping good records is essential to filling your tax returns and paying your taxes correctly. Whether you are a hobbyist or a serious investor, you should make sure you have records of all your crypto activities. According to the ATO, you need to keep cryptocurrency transaction records for about 5 years after your transactions.
What kind of information should you have at hand? First of all, a detailed log of all your transactions will go a long way. You need to know the dates of all your transactions so you can check the crypto asset prices at the time of the transaction. Considering the volatility of crypto prices, you should take note of the exact time you made the transaction and the value of the asset in fiat currency at the time.
You should also keep a record of the transaction purpose and the other parties involved. You can simply put down the cryptocurrency addresses of the other parties if you don’t know their identities.
It is good to have receipts for all your crypto purchases and transfers. Similarly, exchange service and wallet records are important as well. You also need the public addresses or keys associated with your crypto assets. If you are using an accountant or software to keep track of your transactions, make sure you have their details as well.
Good record keeping can save you a lot of headaches and possibly money, so make sure you have the necessary information at hand.
Will There Be New Regulatory Frameworks for Crypto Taxes?
All this said you should also keep in mind that everything about cryptocurrencies is constantly evolving as the asset class grows and gains more character. Governments around the world have only begun to pay attention to cryptocurrencies in the past few years but now that the Nyan Cat is officially out of the NFT bag, we can only expect more changes to take place within the crypto economy in the near future. That also goes for currency tax regulations as the existing taxing schemes are mainly based on other asset classes like stocks and property and don’t address the realities of cryptocurrency transactions wholly.
The Australian Senate’s Committee on Australia as a Technology and Financial Centre recently presented a final report on cryptocurrencies to the Australian Parliament, suggesting innovations of the country’s existing regulations. The Senate report suggested new regulations, including tax discounts and changes to CGT’s application to all crypto to crypto transactions. A new regulatory framework can be created for crypto assets that would change how taxes apply to crypto transactions.
However, such changes may not be coming for a long time, considering this is an initial report and there are many steps officials have to take before making it a reality. So until then, you can use the information we provided in this article to file your taxes.
A Few Words Before You Go…
Authorities began to take crypto tax reporting very seriously in the past couple of years. If you are not sure you can fulfil your crypto tax obligations by yourself, getting help from a tax professional could be a good idea. Hopefully, this guide helped you understand the tax implications of your cryptocurrency transactions and make you feel empowered to start filing your own crypto tax records.