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 cryptocurrencies without paying taxes?
Unfortunately not. If you buy cryptocurrency as an investment, Capital Gains Tax (CGT) will apply. If you buy and sell cryptocurrencies as a trader, you will be charged income tax.
This applies regardless of where in the world the cryptocurrency is bought and sold and the degree of anonymity associated with the sale.
How do I pay taxes on my cryptocurrency investment?
Capital Gains Tax (CGT) applies to profits derived from investing in cryptocurrencies.
This is calculated based on the difference between the amount you paid for the cryptocurrency and the amount you parted with it. Any profits are 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 calculated like this:
- Deduct the cost basis of the product of sale. The cost basis is the price you paid for the cryptocurrency plus incidental costs.
- Next, eliminate any capital losses you have.
- Then deduct the profit. 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 taxable at your marginal rate.
Deletion occurs when:
- sell cryptocurrencies for Australian dollars;
- exchange one cryptocurrency for another;
- give away cryptocurrencies;
- cryptocurrency trading; either
- Use cryptocurrencies to pay for goods or services.
In some cases, such as when you give it away, the profits are replaced by the market value.
How is the cryptocurrency tax calculated?
If you invest in cryptocurrencies, you pay CGT on each sale (see above).
If you regularly buy and sell cryptocurrencies for the purpose of making a profit, the profits from the sale of cryptocurrencies will not be subject to CGT, but will be assessable income as you will be considered a trader and not an investor. In fact, you will be considered as a buyer/seller of cryptocurrencies.
There can be a fine line between being an investor and a trader; Generally speaking, if you are turning over your cryptocurrency every few days in search of profits, have many transactions, and are running a business-like structure (with, for example, a business plan, accounts and records of trading actions, local trade, licenses or qualifications, a registered business name and an Australian business number), you will be a trader. If you hold cryptocurrency with an eye toward long-term gains, you are likely an investor.
If you are a cryptocurrency trader, sales and purchases are converted to AUD on the date you receive the proceeds or make the payment. You must also apply the trading stock rules to determine if there is any income or deduction due to the change in the value of your trading stock.
Can cryptocurrency losses be claimed for taxes?
If you are an investor and the proceeds from your sale are less than your cost basis, you will suffer a capital loss. These losses can be offset by capital gains arising in the same year and, to the extent that they are not exhausted, they can be carried over indefinitely until capital gains arise to absorb them. Capital losses can only be offset against capital gains, they cannot be offset against any other form of income.
If you lose your coins, have them stolen, or are 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 suffer a loss, this can potentially be set off against any other income arising in the same year (subject to the application of anti-avoidance rules relating to non-trading losses).
Can you sell your cryptocurrency investment without paying taxes?
In most of the cases, no. Some taxpayers mistakenly think they can buy up to $10,000 worth of cryptocurrency and avoid CGT by taking advantage of the โpersonal use exemption.โ
This exemption only applies when the cost of the cryptocurrency does not exceed $10,000 and you can prove that the cryptocurrency was intended to finance genuine personal consumption, such as paying for a vacation, a car, your wedding, etc.
Wrongly relying on this exemption is one of the main reasons why people breach the ATO; Expect to be asked to provide evidence that you used (or intended to use) your cryptocurrency to fund personal expenses 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 is for personal use or not.
When should I pay taxes on my cryptocurrency investment?
Generally, you must pay taxes on profits/earnings arising in a tax year after you file your tax return for that year. If you do not use an agent to file your tax return, payment will be due 21 days after:
- relevant filing due date, or
- The evaluation notification is considered received (which is three days after it is issued).
If you use a tax agent, the payment date is between March 21 and June 5 of the following year, depending on when you file your tax return.
How do I record crypto transactions on my tax return?
The ATO compares data it receives from Australian cryptocurrency designated service providers (DSPs) with its own records to identify individuals who may not be meeting their tax obligations.
If what you disclose to the ATO in your tax return does not match the data the ATO received from the DSPs, you can expect at least a "please explain" letter. This makes it much more difficult to hide behind the anonymity that was previously one of the hallmarks of cryptocurrencies.
Be sure to 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 obtained from a reputable online exchange); and
- what the transaction was for and who the other party was (even if it's just your cryptocurrency address).
The types of records you must keep include:
- cryptocurrency purchase or transfer receipts;
- exchange records;
- records of agents, 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, whether during CGT hours or business hours. Talk to an experienced cryptocurrency tax accountant, like H&R Block, if you're not sure how to do this or just need general advice.
How is the tax treatment of NFTs different?
NFTs are non-fungible tokens, another type of crypto asset. An NFT involves digital technology similar to that of other crypto assets. However, a non-fungible token is not exchangeable in the same way as cryptocurrencies or tokens.
NFTs typically register ownership of digital images or artwork, 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 CGT disposal rules, while 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 an exclusive four-hour viewing of the portrait in a private viewing room at Jessica's Australian gallery each year for up to 20 people.
On subsequent transfers of NFTs to new owners, the smart contract allocates part of the proceeds to Jessica as commission. She retains all other rights associated with the painting.
The proceeds from the initial sale would be assessable as business income to Jessica. As long as Jessica remained in business, any commission received would also be business income. If Jessica were to cease carrying on the business, the commissions would continue to be taxable to her as ordinary income.
Compare that to the situation of Bernard, who purchases one of Jessica's NFTs. He runs a travel company and 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 company and will be subject to CGT upon disposal.
Author Mark Chapman is director of tax communications at H&R Block.
