The taxman has a finger in every pie and that includes cryptocurrencies and NFTs. In the following explainer H&R Block’s Mark Chapman answers all the burning tax questions surrounding these new-age investments.
Can I invest in cryptocurrency without paying taxes?
Unfortunately, not. If you buy cryptocurrency as an investment, Capital Gains Tax (CGT) will apply. If you buy and sell cryptocurrency as a trader, income tax will be charged.
This applies regardless of where in the world the cryptocurrency is bought and sold and regardless of the degree of anonymity associated with the sale
How do I pay taxes on my cryptocurrency investment?
Capital Gains Tax (CGT) applies on gains arising from investment in cryptocurrency.
This is calculated based on the difference between the amount you paid for the cryptocurrency and the amount you disposed of it for. Any profit is subject to CGT, which can potentially be discounted by 50% if you hold your crypto asset for more than 12 months.
Your capital gain is worked out like this:
- Deduct the cost base from the sale proceeds. The cost base is the price you paid for the cryptocurrency plus incidental costs.
- Next, take away any capital losses you have.
- Then discount the gain. Individuals are entitled to a 50% discount. The asset must have been held for 12 months or more for the discount to be available.
- The resulting figure is your net capital gain. This is subject to tax at your marginal rate.
Disposal occurs when:
- selling cryptocurrency for Australian dollars;
- exchanging one cryptocurrency for another;
- gifting cryptocurrency;
- trading cryptocurrency; or
- using cryptocurrency to pay for goods or services.
In some cases, such as when you gift it, market value is substituted for proceeds.
How is tax on cryptocurrency computed?
If you invest in cryptocurrency, you pay CGT on each disposal (see above).
If you buy and sell cryptocurrency on a regular basis with a view to making a profit, then the profits on disposal of the cryptocurrency will not be subject to CGT but will be assessable income since you will be regarded as a trader rather than an investor. In effect, you’ll be regarded as being in business as a buyer/seller of cryptocurrency.
It can be a fine line between being an investor and a trader – broadly speaking if you are turning over your cryptocurrency every few days chasing profits, you have many transactions and you are running a business-like structure (with for example a business plan, accounts and records of trading stock, business premises, licences or qualifications, a registered business name and an Australian business number) you will be a trader. If you are holding the cryptocurrency with a view to long-term gain, you are likely to be an investor.
If you are a crypto trader, the sales and purchases are converted to AUD at the date you receive the proceeds/make the payment. You must also apply the trading stock rules to determine if there is any income or deduction due to the changing value of your trading stock.
Can you claim cryptocurrency losses on tax?
If you are an investor and your sale proceeds are less than your cost base, you will make a capital loss. These losses can be offset against capital gains arising in the same year and to the extent they are not used up, they can be carried forward indefinitely until capital gains arise to absorb them. Capital losses can only be offset against capital gains, they can’t be offset against any other form of income.
If you lose your coins, they are stolen or you are otherwise subject to fraud you may be able to claim the value of your losses as a capital loss.
If you are a trader and you make a loss, this can potentially be offset against any other income arising in the same year (subject to the application of anti-avoidance rules relating to non-commercial losses).
Can you sell your cryptocurrency investment without paying taxes?
In most cases, no. Some taxpayers mistakenly think that you can buy up to $10,000 of cryptocurrency and avoid CGT by taking advantage of the ‘personal use exemption’.
This exemption only applies where the cost of the cryptocurrency does not exceed $10,000 and you can demonstrate that the cryptocurrency was to fund genuine personal consumption, such as paying for a holiday, a car, your wedding, etc.
Mistakenly relying on this exemption is one of the biggest reasons people fall foul of the ATO; expect to be asked to provide proof that you either did – or intended to – use your cryptocurrency to fund personal spending on goods and services.
Where the cost of your cryptocurrency assets exceeds $10,000, the personal use exemption will not be available and CGT will apply, whether the asset was for personal use or not.
When do I pay tax on my cryptocurrency investment?
Usually, you must pay tax on any profits/gains arising in a tax year after you lodge your tax return for that year. If you don’t use an agent to lodge your tax return, payment will be due on the later of 21 days after the:
- relevant lodgment due date, or
- notice of assessment is deemed received (which is three days after issue).
If you use a tax agent, the payment date is between March 21 and June 5 of the following year, depending on when you lodge your tax return.
How do I record crypto transactions on my tax return?
The ATO matches data that it receives from Australian cryptocurrency designated service providers (DSPs) against its own records to identify individuals who may not be meeting their tax obligations.
If what you disclose to the ATO on your tax return doesn’t match the data the ATO has received from DSPs, you can expect at the very least a ‘please explain’ letter. This makes it much harder to hide behind the anonymity that previously was one of the hallmarks of cryptocurrency.
Make sure you keep the following records in relation to your cryptocurrency transactions:
- the date of the transactions;
- the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange); and
- what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).
The sorts of records you should keep include:
- receipts of purchase or transfer of cryptocurrency;
- exchange records;
- records of agent, accountants and legal costs;
- digital wallet records and keys; and
- software costs related to managing your tax affairs.
Always declare your cryptocurrency transactions on your tax return, either at the CGT schedules or the business schedules. Speak to a tax accountant with experience of cryptocurrency, like H&R Block, if you’re not sure how to do this or if you just need general advice.
How does the tax treatment of NFTs differ?
NFTs are non-fungible tokens, another type of crypto asset. An NFT involves similar digital technology as other crypto assets. However, a non-fungible token is not interchangeable in the same way as crypto coins or tokens.
NFTs typically record ownership of digital pictures or artworks, video clips, memes and items used in online games. You can use an NFT to represent an ownership interest in any tangible or intangible asset.
The tax treatment of non-fungible tokens (NFTs) follows the same general principles as cryptocurrencies; if the token is created or acquired as an investment, it will be subject to the CGT rules on disposal whereas if the token is created or acquired as part of a business, it will be subject to income tax.
For example, Jessica is a professional artist. She paints a portrait of a famous Australian and decides to create 10 NFTs. Each NFT provides the right to one, four-hour, exclusive viewing of the portrait in a private viewing room in Jessica’s Australian gallery each year for up to 20 people.
On subsequent transfers of the NFTs to new owners, the smart contract allocates part of the proceeds to Jessica as a commission. She retains all other rights associated with the painting.
The proceeds of the initial sale would be assessable as business income to Jessica. While Jessica remained in business any commissions received would also be business income. If Jessica ceased carrying on the business the commissions would still be assessable as ordinary income to her.
Compare that to the situation with Bernard, who buys one of Jessica’s NFTs. He runs a tour business and he plans to use the private viewing of the portrait as part of an annual art tour of the region. The NFT is a capital gains tax asset of the business and will be subject to CGT on disposal.
Author Mark Chapman is the director of tax communications at H&R Block.