It is generally understood that there are taxation implications when transacting with cryptocurrency (whether in the form of capital gains tax or income tax) – however, not all tax liabilities are created equal.
Whether you’re buying, selling, swapping, staking or wrapping your crypto, there will be a whole heap of tax implications that you will need to understand before you dive into crypto investing.
So how is your cryptocurrency taxed?
How does capital gains tax apply to crypto?
Capital gains tax (CGT) is the tax paid on a capital gain made from the sale of a capital asset.
A capital gain (or loss) is calculated by subtracting the price your crypto cost to buy (Cost Base) from the price your crypto cost to sell (Capital Proceeds).
For instance: If you purchase 1 Ethereum for $3,000 and sell it for $5,000, your capital gains is $2,000 ($5,000 less $3,000).
Once you determine your capital gain, you will then pay tax on the capital gain at your individual tax rate.
In the alternative, if you make a capital loss, you will be able to offset that capital loss against future capital gains.
Do I make a capital gain/loss if I swap one crypto to another?
A common misconception is that you only make a capital gain/loss if you sell your crypto, however, this is far from the truth.
If you exchange one cryptocurrency for another (e.g. Ethereum for Bitcoin), it will still be considered a CGT event. This is because you have disposed of your cryptocurrency, which results in a capital gain or loss.
You purchase 1 Bitcoin for $30,000. You later swap the Bitcoin for 8 Ethereum. 1 Ethereum was valued at $5,000 per Ethereum. The capital gain on the transaction will be $10,000. This is calculated using the below formula:
Capital Gain = Capital Proceeds less Cost Base
- Capital Proceeds = $40,000 (the price of 8 Ethereum at the time of exchange); and
- Cost Base = $30,000 (the price of 1 Bitcoin at the time it was purchased).
Do I pay tax on transactions involving non-fungible tokens (NFTs)?
NFTs are scarce digital assets built on a cryptocurrency blockchain. They can be bought off various websites (most commonly OpenSea) and are stored in your crypto wallet.
While the ATO is silent on the specific tax obligations for NFTs, due to the asset-like nature of NFTs, it is likely that selling an NFT will also result in a capital gain/loss.
You purchase one CryptoPunk for $100 and later sold it for $3,000. While you’ll be kicking yourself for not holding it for longer, your capital gain would be $2,900. This is calculated using the below formula:
Capital Gain = Capital Proceeds less Cost Base
- Capital Proceeds = $3,000 (the price you received for selling the CryptoPunk); and
- Cost Base = $100 (the price you paid to acquire the CryptoPunk).
Is wrapping crypto a CGT event?
If you’ve bought an NFT or staked your crypto, you’ll be familiar with wrapping crypto. Wrapping crypto is the process of transfering cryptocurrency between blockchains. It involves wrapping a token and receiving a similar token in return.
In terms of the tax implications, there are two arguments:
- Wrapping a crypto token is a ‘like-for-like’ trade, so it is not a taxable event. It is just a deposit/withdrawal similar to transferring money from one bank account to another and does not trigger a CGT event.
- Wrapping a crypto token creates a different asset class for CGT purposes and is taxed as a regular crypto-crypto transaction, hence triggering a CGT event.
Given the ATO usually takes the conservative position when there are discrepancies like this, you should check with your accountant to see which of the above positions will apply.
Do I have to pay tax on rewards from staking crypto?
Staking is a process whereby you ‘lock-up’ your crypto to support the operation and security of the blockchain network. As a reward for locking up your crypto, you receive more crypto – similar to earning interest from a term deposit.
Funnily enough, the taxation implications on staking crypto are akin to that of deriving interest from a term deposit – you will be deemed to receive income equal to the value of the tokens you receive from staking, which are then taxed according to your income tax bracket.
If you stake 4,000 Matic and receive 1.5 Matic per day as a staking reward, you will be taken to have received income equal to the market value of 1.5 Matic each day. Given the value of cryptocurrency drastically fluctuates day-to-day, it can be an accounting nightmare to calculate how much income you make from staking by the end of a financial year.
However, it doesn’t end there, given you are acquiring 1.5 Matic per day (and crypto is considered a capital asset), you will make a capital gain/loss when you later dispose of that Matic.
- The date of acquisition will be the date you earn the Matic as a staking reward;
- The cost base will be the market value of the Matic on the date you received it as a staking reward; and
- The capital proceeds will be the proceeds you receive from selling the Matic when you later dispose of it.
Do I have to pay tax on airdropped rewards?
An airdrop is a term used to describe when cryptocurrency projects deposit a crypto into your cryptocurrency wallet. As with staking, crypto received in the form of airdrops will also constitute income equal to the value of the crypto received.
If you receive 1 Ethereum as an airdrop, you will be taken to have received income equal to the market value of the 1 Ethereum on the date it was airdropped to you.
However, as with staking, it doesn’t end there, given you are acquiring 1 Ethereum, you will make a capital gain/loss when you later dispose of that Ethereum.
- The date of acquisition will be the date you are airdropped the Ethereum;
- The cost base will be the market value of the Ethereum on the date you received it as an airdrop; and
- The capital proceeds will be the proceeds you receive from selling the Ethereum when you later dispose of it.
Can I reduce my capital gains tax on crypto?
Absolutely, if you hold your cryptocurrency and do not sell, swap or wrap it for 12 months or more, you will be entitled to the 50% CGT discount to reduce any capital gain you make when you dispose of the cryptocurrency.
You may also decide to invest in cryptocurrency via a discretionary trust. This will allow you to:
- obtain asset protection by quarantining your investments from assets held in your personal name where you appoint a company to act as trustee of the trust;
- distribute income to any of the beneficiaries of the discretionary trust;
- have income taxed at the beneficiary level, meaning the tax paid on income derived from your investment will be nominal where the beneficiaries are low income earners; and
- obtain the benefit of the 50% CGT discount on disposal of your cryptocurrency.
Should I keep records of my crypto transactions?
Absolutely, it is of upmost importance that you maintain records of all your cryptocurrency transactions for a period of 5 years from the date of each transaction – after all, you never know when the ATO may request a copy of your records.
The records you maintain must include/contain the following:
- the date of the transactions;
- the value of the cryptocurrency in Australian dollars at the time of the transaction;
- what the transaction was for and who the other party was;
- receipts of purchase or transfer of cryptocurrency;
- exchange records; and
- digital wallet records and keys.
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