How Investing in Cryptocurrency Impacts Your Tax Return

So, you made some money off crypto investments this year. That’s exciting news. But what do you do come tax time?

That’s the question a whole lot of Aussies are asking at the moment, and seeing as we have tax tips on the brain right now, we in the Lifehacker Australia office thought we’d seek out some advice for all you cryptocurrency champs.

Mena Theodorou, the co-founder of Australian cryptocurrency exchange Coinstash, spoke to us over email and shared her thoughts.

Crypto is hot right now, so the ATO is paying close attention
As many of you likely know by now, this tax season will have a lot of interest placed on crypto and the declaration of earnings in that space.

Theodorou explained that you should “Expect the ATO to dedicate more resources to investigating your tax returns if you have bought or sold any crypto assets during the year. We know that information is being shared across Government departments, at both the State and Federal levels. So, it’s important that you make sure you work with your accountants to declare everything accurately.”

If you’re unsure about anything, speak with an accountant – ideally one who has experience with crypto – and be thorough in sourcing your transaction history when pulling together your tax data this year.

There are three rules you should keep in mind this tax season
Depending on how you invest in crypto, what kind of earnings you’ve made and what you’ve done with said earnings, the rules differ.

Theodorou shared three key things that you must consider come tax time.

Personal use asset exemption:

“For the crypto hobbyist, there is a $10,000 ‘Personal Use Asset tax exemption,” Theodorou said.

She explained that if a hobbyist purchased under $10,000 worth of crypto and that has been used for personal use or for purchasing goods, then no tax is payable.

A really important eligibility factor to keep in mind is that the crypto that you purchased must not have been for investment purposes, as part of a profit-making scheme, or in the course of business activities. Make sure you work with your accountant to determine if you meet the eligibility criteria, Theodorou stressed.

How long you have held onto your crypto before using it for personal use is also of note here. And if you have exchanged your cryptocurrency into Australian dollars (or a different cryptocurrency) to make purchases, this will not be considered a personal use asset. Keep reading here.

Are you a trader, investor or hobbyist?

Your classification as either a ‘trader’, ‘investor’, or ‘hobbyist’ has a huge impact on your “crypto bottom line”, Theodorou shared.

The distinctions between the three types [of classification] are often blurred and it’s crucial to seek advice on which category you fall under because it can have significant consequences.

As a general guide (though you should absolutely speak with an accountant to confirm where you land) Theodorou said that:

A crypto ‘investor’ is likely dealing with the capital gains tax (CGT) rules when they buy [or] sell their crypto assets. As such, the investor could be eligible for the 50% CGT discount.

On the other hand, a crypto trader is likely to be buying and selling quite frequently such that they’re conducting a business. While they might not be entitled to the CGT discount, any losses they generate could potentially be offset against other income (subject to certain rules and thresholds).

The regulations vary considerably, so it’s important to figure out what’s right for you and your crypto.

Chain splits can be taxable:

For those who are unfamiliar with the term, Theodorou explained that “chain splits occur when there are two or more competing versions of a blockchain”.

She said that “If you receive new crypto as a result of a chain split – [like] Bitcoin holders receiving Bitcoin Cash – and you hold the new crypto as an investment, you’ll likely make a capital gain when you sell it”.

Don’t forget that crypto trades are taxable
One of the more common misconceptions Theodorou pointed to during our exchange was that some folks believe that the act of swapping one cryptocurrency for another is not taxable.

“The answer couldn’t be further from the truth,” she said.

“Tax is still payable on the trade even if you have not realised any of the gains in fiat. Therefore it is essential that you record the fiat value of the crypto at the time you swap it for the other crypto.”

The ATO has a lot of information available in this space
If you’re still learning about how to properly approach your cryptocurrency come tax time, it’s worth having a read through the resources on the ATO website – in addition to speaking with your accountant.

Theodorou also stated that you can explore the option of the ATO’s private ruling feature.

According to the ATO website, this is “binding advice that sets out how a tax law applies to you in relation to a specific scheme or circumstance.”

“We know of users who have had very positive experiences getting certainty from the ATO on how the tax rules apply to their crypto activities via the private ruling feature,” Theodorou shared.

She explained that the “feature is often used for issues for which the answer is highly dependant on the facts e.g. whether you’re a trader, investor, or hobbyist. It’s a little-known feature that Aussies can take advantage of.”

Hopefully, you’re feeling a little more confident in how to approach your tax return this year now. When in doubt, however, just reach out to a tax pro.