Crypto is still a new thing to many people, so if you are new to the scene, it can be unclear what expectations rest on your shoulders come tax time. But one thing you can be sure of is that if it can be taxed, it will be taxed, so having a good understanding of the ins and outs makes a big difference. And with the days counting down to tax season, there is no better time to brush up on the facts.
There are plenty of situational considerations, but some obvious things include when you need to report, how much tax you can expect to pay, and what major pitfalls you can avoid to potentially save both time and money. Having a clear understanding of your options can only be beneficial.
However, the first subject to consider is the Australian Tax Office (ATO) and what you can expect from them as tax season rolls around. So, if you want some helpful information and tips to prepare yourself, check out the rest of the article below.
The ATO and How It Views Tax on Crypto Gains
So, how much tax do you pay on crypto gains? Well, to answer that question, you first need to understand some general rules and how the ATO classifies crypto. The Australian Tax Office plays an integral role in determining your responsibilities, starting with whether you have to pay at all.
If your overall earnings for a year do not exceed $18,201, then you do not have to worry about a thing. Otherwise, it depends on a few things, including whether you are considered an investor or a trader.
Crypto Tax Classification
While your first thought might be to classify your crypto as currency or foreign currency, it is actually considered property by the Australian government. That means it is thought of as an asset where capital gains tax (CGT) is concerned. However, under certain circumstances, it can also be seen as additional income. In that case, it is taxed as income tax.
To determine what applies to your situation, the best place to start is the difference between investors and traders.
Investors and Traders
The two types when it comes to crypto taxation are investors and traders. To put it simply, a crypto investor is an individual looking for a return in the future. Meanwhile, a trader has a business-like setup, where frequent buying and selling are used to generate income.
There is more to it than that, which will be covered below, but investors generally pay capital gains tax, whereas traders see more income tax. To get a better understanding of your own situation, take a look at the detailed sections below.
Investors – Capital Gains Tax
The goal of an investor is to build a portfolio of some sort and seek long-term wealth, at least compared to a trader. They tend to buy crypto and hold onto it, much like a stock. In this case, the gains are considered long-term capital gains.
Of course, even in these cases, there are instances where income tax is involved, but it is usually subject to capital gains tax. It is also the more common type in the Australian crypto world. If you believe you will be classified as an investor, be prepared to pay capital gains tax.
Traders – Income Tax
Traders are different from investors in that they focus on frequent transactions that are meant to generate income by following market trends. But it is not limited to trading. What might classify one as a trader includes:
- Running a crypto trading business
- Having a crypto forging or mining business
- Buying and selling for short-term gains
- Managing a crypto exchange
Business activities with the intent to earn income push one toward paying income tax. There are a lot of factors to consider, but in short, if you are treating it as a business, it will likely fall under income tax.
Capital Gains Tax for Crypto
A majority of the people involved in crypto will find themselves paying capital gains tax instead of income tax. That means that any time you dispose of your crypto asset, you will have to take it into consideration. And that includes various things, such as when:
- Selling crypto
- Swapping it for other crypto
- Spending it like currency to buy things
- Giving it to others
It behaves like other assets, so if you are familiar with the mechanisms, then you already have a decent grasp on things. As for the percentage you have to pay, it is the same as your income tax rate. So, it will vary based on the overall income during the tax year. For specific information on those rates, check the ATO’s website.
Calculating Capital Gains Tax
To truly understand how much tax you pay on crypto gains, you still need to do some calculations. Primarily, you need to figure out the difference between how much the crypto was worth when you bought it and when you sold it. The result can be a loss or a gain, which have different implications:
- If you gained money after selling the asset, you have to pay capital gains tax
- If you lost money after selling the asset, you do not have to pay capital gains tax
In fact, capital losses can negate an equal amount of gains, so it is important to keep a grand total as well. You will also want to keep fees paid during the crypto purchase in mind since those count toward the cost basis, which is how you determine the initial price.
Additionally, if you did not directly sell the crypto, use the equivalent fair market value of the day to make the calculations.
Capital Gains Tax Discount
An advantage for investors when it comes to capital gains tax is when it comes to long-term capital gains. The discount is simple: if you keep the asset for longer than a year before disposing of it, you receive a 50% discount. That means half the capital gains tax, which makes a huge impact.
Income Tax for Crypto
The other tax you might end up paying is income tax. It is not as frequently seen as capital gains tax, but it is worth understanding. Particularly, you need to know it if you fall under the umbrella of a trader. If that is the case, the crypto is treated as income and becomes subject to income tax.
Crypto is treated as income if you are paid in crypto, earn it from a platform for something like a referral bonus, receive it from DeFi interest, and more. Basically, just consider whether it is a traditional investment or a form of income. If it is income, plan on paying income tax.
Cost Basis Methods In Australia
Another thing to keep in mind is that the ATO requires different capital basis methods based on whether you are a trader or investor. Investors have the most freedom, and they are allowed to use the FIFO, HIFO, or LIFO methods. Meanwhile, traders must use the FIFO method.
When and How to File
You should now have a better understanding of the calculations ahead and what you might need to prepare. With that taken care of, it is time to answer the important questions of when you can file and how to do it.
The tax year in Australia ranges from July 1st to June 30th of the next year, and the deadline is October 31st this year. That being said, there is an exception if you file via an accountant, in which case you have until March 31st, 2023.
As for the actual filing process, you have to report your crypto activity to the ATO. That includes income or capital gains, which must be declared in your annual tax return. It is important to note that the ATO tracks your crypto situation, so you will likely receive a warning letter if you need to declare crypto gains.
Regardless, this involves filing paperwork, which can be done using paper forms or myTax. Both are viable options, so it comes down to preference.
Getting Help with Crypto Taxes
As mentioned before, crypto tax is a young system, so it can be daunting to suddenly have to deal with it. Fortunately, there are some options if you need a bit of help. The first is to hand everything over to an accountant, which is reliable but comes at a high average cost. It can also take some time and is out of your hands in the meantime.
An alternative is to use software assistance, such as Koinly, which can take care of the hard part for you. It can be used to generate a full report that can guide you when personally filling out your tax return. Or, it can be sent directly to an accountant, who can then use it to quickly file your return for you.
Reasons to Try Crypto Tax Software Like Koinly
It is hard to go wrong when you use crypto tax software. For starters, it is specialized in crypto tax, so you can trust it to be up to date with the latest changes and completely reliable when it comes to getting you the best result.
They can also save you time. For instance, Koinly can connect to your crypto wallet’s public address or link to a crypto exchange using APIs. Those connections mean it gets direct access to the exchange rates for any relevant days, saving you the trouble of looking them up to properly calculate your transactions.
The result of using the software is an immense amount of time saved, reduced human error, and an easy-to-use interface that makes the process a breeze. Plus, it saves you money, allowing you to avoid costly accountant bills while offering you tax-ready reports to use on your own or pass over to a professional.
The best part? You can sign up for Koinly for free, exploring the platform and getting a feel for things before you commit to anything. So if you want quick results, it’s definitely worth checking out.
The Broad Strokes
How much tax you pay on crypto gains is not always an easy answer. It can depend on various factors and can take a lot of time and effort if you have a significant number of transactions. Fortunately, you can get help if you need it, either from a professional accountant or through crypto tax software like Koinly.
You should also keep in mind that tax rates and regulations regarding crypto are set in stone for this year but might change in the future. That is especially so considering the young crypto tax system. So, make sure you stay apprised of your responsibilities when it comes to crypto gains tax, or at least trust a service that does.