How NOT to do your crypto tax in Australia
There’s a lot of good advice on how to do your crypto tax this year. There’s also some astoundingly bad advice.
Like, send you to prison bad. Put you on a payment plan for the next ten years bad. Change your name, grow a moustache, and move to Bermuda bad.
Friends, whether you think taxation is theft, or an absolute obligation for the good of your fellow man, you don’t want to get things wrong with the Australia Tax Office (ATO).
They can make your life hard. And they have the tools to do it.
Whether you’re an accidental trader who bought a couple of ETH last year and ended up going down the rabbit hole with a thousand trades, or whether you just held them for six months and ended up selling them at the peak (or the trough — our condolences), you have a tax obligation to sort out.
We think it’s a good idea to pay your tax, and we think you should make the best possible effort to get your reporting right, because a mistake can be costly down the line.
Before we get started — please note that cryptocurrency is typically treated as a ‘Capital Gains Tax’ (CGT) asset for tax purposes. You should know and understand CGT before diving into any other crypto tax information.
Having said all that, here’s some common mistakes we’ve seen doing the rounds on crypto groups all over the net:
1. If you have under $10,000 in Crypto, it’s for personal use and isn’t taxed.
FALSE! This one usually comes from misreading the way that the ATO treats personal use assets.
You can buy up to $10,000 of crypto for personal use. But the definition of personal use here is very specific: usually it’s buying crypto to directly buy something else with crypto, over a short time period. An ATO example:
Michael wants to attend a concert. The concert provider offers discounted ticket prices for payments made in cryptocurrency. Michael pays $270 to acquire cryptocurrency and uses the cryptocurrency to pay for the tickets on the same day. Having regard to the circumstances in which Michael acquired and used the cryptocurrency, the cryptocurrency is a personal use asset.
In that case, you won’t have to apply CGT to it. Nice!
However, if you hold on to that crypto for a long time before buying that concert ticket, it may no longer be personal use.
There aren’t any exact parameters for defining personal use — it’s more the ‘vibe’. And if the ATO questions a transaction, the burden of proof is on you.
If you buy that crypto in the first place as an investment, or to try and make a profit with, or to run any kind of business with, then it’s definitely treated as a capital gain, not personal use.
And no, just saying ‘this is for personal use’ doesn’t count.
2. You only pay tax when you take money out of crypto, back to fiat
FALSE. Gosh though, it would make our lives a lot easier.
You generate a ‘CGT event’ every time you sell, trade or gift cryptocurrency.
If you buy a bitcoin at $100 (lucky you), that $100 amount is its ‘cost base’.
If you sell it less than a year later at $300 (should have hodl’ed), you made $200 in capital gains, and that $200 gets added to your total taxable income.
If you held it for more than a year and sold it for $300, you’ll discount that $200 capital gain by 50% and only add $100 to your total taxable income.
If you have hundreds of trades, you better hope that you or the exchanges you’ve used have kept good records, because each of those trades count as a CGT taxable event.
Some exchanges, like EtherDelta, are harder to track but it’s definitely possible — leave a comment if you need help.
3. You can claim a loss on crypto against your income tax
FALSE! Because crypto is treated as a CGT asset, you only make capital gains or capital losses. And capital losses can only be offset against capital gains.
So, for the last financial year, if you lost money in any trades you made, you can offset those losses against gains you made in the same year.
If, overall, you lost more than you gained, you can’t just reduce your total taxable income though.
The good news is that you can roll that loss forward — so if you make a gain in this new financial year, last year’s loss can still discount your overall tax bill somewhat.
4. You can sell all of your crypto before end-of-financial-year to claim a loss, and buy it all back in the new financial year.
WOAH! False. And super illegal as well.
This is called a ‘Wash Sale’, and it’s very relevant given crypto’s volatility over the last six months.
A wash sale is the sale and purchase of an asset, where the two transactions effectively cancel each other out — commonly used to try and claim a loss.
Say you bought 10 ETH in December — and since then watched the price drop a lot. So, you decide to sell them on June 29, claim a big capital loss to reduce your tax bill, and then buy 10 ETH back on July 1 for a similar price to what you sold them for. That’s a wash sale.
The ATO knows there are more sophisticated ways of doing it — including buying back different but similar assets, spreading out the time of sale and buyback, and so on. And they can turn those up in an audit.
If you get caught, you’ll be liable for the original tax bill, and probably get fined too.
5. You shouldn’t do a tax return on your crypto if you made a loss.
WRONG! For reasons explained in point 3, you should always report your capital losses.
You might make a capital gain the year after, and all of those losses will come in handy when you want to reduce that future tax bill.
6. Airdrops and forked tokens — I’m confused.
Well, that’s not a statement that we can write ‘FALSE’ underneath, but there’s a lot of questions around how these ‘free’ tokens are treated.
With a capital gains asset, the only point that matters is the CGT event:
You generate a ‘CGT event’ every time you sell, trade or gift cryptocurrency.
So, if you do nothing with an airdropped or forked token (where the heck did that VIN come from anyway?), you will never owe tax on it.
However, if you do sell, trade or gift that airdropped or forked token, you generate a CGT event. The cost base for the token is $0, since it was free.
Which means you either add the whole value at time of disposal to your total taxable income, or half if you held the asset for more than 12 months.
7. You only generate a Capital Gains Event once you receive your tokens from an ICO, not when you initially invest
WRONG AGAIN! ICOs are the wild west of investing and this one can be confusing, especially since your ICO tokens are usually held up for months.
You generate a CGT event when you dispose of a token. In this case, that’s making your contribution to the ICO or token sale.
Since you dispose of your tokens when you make your contribution, it’s best to record the acquisition date of your new tokens at the same time, even if you don’t receive them until a while later.
The cost base is whatever you paid per token — taking into account all discounts or bonuses as well.
8. I can gift my crypto and it won’t be taxed
NOPE! Sounds like a nice idea, but it leaves all sorts of tax loopholes open — transferring assets between family members for example.
If we can be a broken record, let’s quote the ATO again:
You generate a ‘CGT event’ every time you sell, trade or gift cryptocurrency.
9. The ATO can’t track crypto transactions and if I don’t declare, I’m safe
FALSE! Also, super risky. There’s a lot of moving parts to this one, so strap in.
Firstly, all major exchanges in Australia are now covered by AUSTRAC. That means they keep records of transactions and the identities associated with those transactions, and the ATO can access those records.
They keep a particular eye on transactions above $10,000 as a safeguard against money laundering — just like ATMs and banks have to.
You might be thinking, well, let’s just use a foreign crypto exchange instead. Also not a good idea: Australia has data-sharing agreements with other countries which run exchanges in order to track attempted tax evasion too.
Another common assumption: Bitcoin and similar cryptoassets are anonymous because a wallet isn’t associated to anyone’s identity.
That’s true to a point, but it’s ignoring a couple of key issues: the blockchain is a public record of transactions which can never be destroyed or changed, and it’s also possible to reasonably link a wallet to an identity.
Because the blockchain is immutable, dodging tax or trying to hide a wallet is leaving a paper trail you can never remove — and being sneaky now might cause you a lot of problems down the track.
If your private wallet has ever interacted with a wallet on an exchange, or you’ve posted it publicly to a social media account linked to one of your emails, chances are it can be tracked back to you.
Even using cryptocurrency tumblers is not a great way to hide your gains — blockchain forensic tools are already very sophisticated and can often reverse the effect of a tumbler. These tools are getting better all the time, and your blockchain transactions are on show for all time.
Finally, even if you manage to perfectly hide all your gains, the ATO also has tools and algorithms which can send up red flags if you’re living way outside of your means.
If you don’t report any capital gains on crypto, and you start driving around in an exotic car with ‘VITALIK’ as a number plate, they’re probably on to you.
Getting caught cheating once, intentional or not, is a good way to ensure your declarations are audited in detail for years to come.
Crypto tax isn’t easy, we know that. In fact, capital gains in general is a pretty tricky topic and not at all intuitive — just like blockchain!
Just like blockchain, there’s also a ‘penny drop’ moment when the whole thing starts making sense. We recommend doing plenty of research, including reading up on the ATO’s tax guidelines for cryptocurrencies.
We should note that there are certain circumstances where cryptocurrency is not treated under CGT rules, for example if you’re carrying on a business of buying and selling cryptocurrency. You can read the ATO’s example here.
The tax advice above is general and doesn’t take into account your own personal situation, so please do your own research, and feel free to leave a comment with any clarifications you might need.
If you’re having trouble, it might be worth engaging a good accountant who has some experience dealing with cryptocurrencies.
There are also some good tools for tracking your transactions — diligence and accurate records are the key to this whole thing.
Finally, if you love crypto but have been burnt by tax issues this year, maybe you’re looking for an easier way to invest. That’s Every Capital.
Every Capital is Australia’s leading retail cryptoasset investment fund. That means it’s open to everyday investors with just a little bit of cash to invest.
Every means no more dealing with exchanges, wallets, and most importantly — no more keeping track of every trade for your tax! We send you a report at the end of the year which just lists one number: your capital gain or loss.
We operate just like a typical managed fund you might use to invest in property or shares, except we’re totally focused on cryptoassets.
Our talented analysts pick a mix of major coins, altcoins, ICOs and stablecoins to create a well balanced portfolio of crypto.
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Follow the Every Capital Medium to learn more about investing in cryptoassets and blockchain tech in Australia. Over the next couple of months, we’ll be talking about alternative assets, what top investors around the world are doing with crypto, and a bit of technical blockchain stuff too.
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Every will begin rolling out to select customers in Q3 2018.
Reserve your place on our waitlist now at www.every.capital
