How is Crypto Taxed in Australia – Bitcoin had a huge bull run in 2017. With all the excitement that surrounded Bitcoin and other cryptocurrencies, one major issue was forgotten; taxation. Any transaction that’s carried out on Bitcoin or altcoin is taxable. This includes mining, spending, exchanging, airdrops and trading.
Tax authorities have focused their attention on Bitcoin gains taxation in 2018. Usually, tax authorities are more forgiving on people who come forward about any tax issues they have rather than who are found out by the authority. Therefore, outing yourself could be the difference between you facing criminal charges or being asked to pay penalties.
A lot of people haven’t declared their cryptocurrency gains. Only a few hundred people have so far paid taxes on gains made since Bitcoin was launched.
So far, no clear guidelines have been provided on how cryptocurrency gains should be handled. Even though a lot of people see Bitcoin and altcoins as currencies, the IRS, for example, classifies them as property. This means that any spending, trading or exchanging of Bitcoins is classified as capital gains. If you work and you are paid in cryptocurrency as wages, then this is considered as income.
There are so many cryptocurrencies. However, Bitcoin is the one that’s more widely known. All issues discussed Bitcoin taxation, therefore, apply to all other cryptocurrencies as well.
Here is an analysis of different cryptocurrency transactions and how tax applies to them.
- Anytime you trade with Bitcoin, it means that you make a profit or a loss. When you make a loss, then this balances out any profits that have been made. This can help you reduce taxes on your gains.
- When you trade one currency for another one – for example when you exchange Ethereum for other altcoins, it means that you will make either a profit or a loss. Any profits that you make are taxable.
- If your wages for services or products are paid in the form of cryptocurrency, then this is considered as regular income. It’s taxable at the exchange rate at the time you receive your income.
- Any crypto spending is considered taxable. This is because you will either make losses or gains because of this spending. For instance, if you purchase a $100 gift coin and then went ahead to buy a $200 gift card, then it means that you made a $100 gain.
- When you exchange cryptocurrency for US Dollars, then this is a taxable event since you will make a profit or a loss. Any profit you make is known as capital gains, which is taxable.
- Airdrops are considered income too. They are taxable at the rate at which they were valued during the airdrop.
- Coin mining is also a taxable event, at the rate of the day at which the mined coin was valued.
- Initial coin offerings don’t fall under tax-free methods for raising capital.
It would be good if it were possible for taxpayers to identify the specific coin that was traded or exchanged so that they can easily manage both their long-term and short-term gains. However, most wallets are not set up to allow identification of coins that are sold or exchanged. Therefore, the government taxes taxpayers on a first in first out basis. The IRS has not provided any guidelines that should be followed so you can use whatever method that you want if you consistently stick to the same method throughout the return period.
If you want to reduce taxation as much as possible, the best thing would be to buy the coins and then hold for longer than one year. Any short-term profits that you make are taxed as ordinary income. On the other hand, long-term profits are taxed at a reduced rate of 15% to 23.8%, based on which bracket you fall under. One thing that you must keep in mind is that cryptocurrencies are quite volatile. Therefore, it might be worth it to sell and get the profit now and take the tax hit. However, you are free to decide what the best thing to do is.
Reporting yourself to the tax authorities is the best way to go when it comes to cryptocurrencies. This is because most exchanges where cryptocurrencies are traded don’t even provide a 1099 form. Nor will they analyze your gains or your losses for you. These exchanges are not monitored by the IRS, so this makes things more complicated. In fact, trading in dollars is not allowed on the exchanges. Ethereum is the preferred option instead of dollars.
More exchanges are starting to become aware of the need for taxation. For instance, Coinbase provides a 1099-k form which is only given to certain users who meet given criteria. This includes businesses, GDAX users and anyone who has made a capital gain of $20,000 and above that resulted from 200 or more transactions in a given year.
You can check your transaction history to help you get records for your sales and purchases. To avoid chances of error, the best thing to do would be to keep a detailed record of all your transactions in the different exchanges that you use and use this information when calculating your tax returns. Important details to record include the date of the transaction, exchanging the coins, spending and mining them. Also, don’t forget to record the exchange rate.
Australian Tax Office (ATO)
Here are a few suggestions on details that you need to record as advised by ATO:
- The date that the transaction took place
- The exchange rate at the time the transaction took place
- The person you transacted with (This can include their Bitcoin address)
- What the transaction was for
Payment for Products or Services
If you are not doing any kind of business, then you don’t have to pay income tax or GST. If the capital gains that you have made from transacting with Bitcoin is less than $10,000, then these capital gains or losses are disregarded.
If you are buying business items and paying for them in Bitcoin, then you qualify for a deduction based on the value of the item.
If you decide to get rid of your Bitcoins, then you might have to pay capital gains. The Bitcoins will be valued at the market rate on the day they were sold.
If the goods and services supplied were taxable, you can get tax credits based on the GST on the Bitcoins that were obtained as payment.
In some cases, instead of being paid in Australian dollars, an employer and employee might agree that the employee will be paid in Bitcoin. In this case, the payment in Bitcoin is seen as a side benefit. In case of such an arrangement but with no written contract, then this payment is considered as regular income.
If there’s a valid sacrifice agreement arrangement, then the employer will have to conform to the Fringe Benefits Tax Assessment Act. In case there’s no valid sacrifice agreement arrangement, then the employer will be obligated to pay as you go as required by law.
Mining as Business
If you mine Bitcoin and then transfer them to a third party, you will be required to pay assessable income. You can deduct any expenses that you have because of the mining from your income. If you incur any losses, the losses will be subject to non-commercial loss provisions.
If you are mining Bitcoins and trading them, then this will be considered as trading stock. You are required to state how much stock you have at the end of every financial year.
Trading Bitcoin as an Exchange Service
Any profits you make because of trading in Bitcoins is considered as assessable income. You can deduct any expenses that you incur because of trading and selling Bitcoin.
If you have any Bitcoin at the end of a financial year, you will be required to declare it as stock. You will have to pay GST for Bitcoin supplies during the exchange service enterprise.
Bitcoin as Investment
Businesses that have acquired Bitcoin as a form of investment could be required to pay taxes on capital gains. However, if you are not carrying out a business by using Bitcoins as an investment, then you won’t have to pay taxes on any gains made. But, if your main goal is to make a profit because of trading Bitcoins, then you will be subject to taxation on any gains that are made when you sell them.
In case Bitcoin is not supplied or acquired to further an enterprise, then you won’t have to deal with GST.
What You Should Know When Tax Time Comes
The momentum in cryptocurrencies peaked in 2017. This was when a lot of investors started buying and selling cryptos.
There could be tax implications for all these people. However, it’s still not yet clear how taxation applies to cryptocurrencies.
If you traded your Bitcoins in the last year, then you are subject to paying taxes on any gains made from the trade.
What you need to know:
- Reporting is on you
When it comes to stocks and bonds, your broker will send you a 1099 form. But when it comes to cryptocurrencies, exchanges don’t send any form. Exchanges like Coinbase that provide these forms only give them to people who have made a profit of $20,000 and above and have carried out at least 200 transactions. This means that only major players benefit from this. If you are a minor player, then you will have to figure out how to file your own tax returns.
- Crypto as property
According to the IRS, cryptocurrency is considered as property, the same way stocks and bonds are viewed as assets. Therefore, any profit that you make because of selling crypto must be declared. If you make a loss, then this will reduce your taxes.
For this to happen, keep a record of important details such as the date when the trade took place, the rate you paid for it, when you sold the crypto and how much you got for it when selling.
This can be overwhelming for someone who has carried out lots of transactions. In such a case, you can use the first in last out principal.
- Don’t hide trades
Don’t try to hide your trades. You might think that no one will know about your capital gains if you don’t declare them to the IRS but they might find out in future, and you will have to pay penalties for what you owe.
In some cases, you might get criminal charges for not properly reporting the gains made. This can result in 5 years in prison or a fine of up to $250,000.
- Keep a log
If you are planning on reporting your cryptocurrency gains this year, you might be stuck perusing through your receipts and emails trying to find statements to collect all your information together.
However, you can change this starting from the next financial year. Start keeping a clear record of all transactions that you carry out. Save a part of the funds that you have. This money that you will keep aside will be used to pay off your taxes. Even though no one will advise you to do this, if you don’t do it, you will have to face the consequences.
Therefore, what you must do is to be conscious that it’s your responsibility to keep track of your trades and any gains made.