If you’re reading this article, you’ve probably reported cryptocurrency on your taxes in past years.
In this guide, we’ll go beyond the typical tax tips you’ll see in articles directed at crypto beginners. Let’s break down 5 tax scenarios that you might encounter as an intermediate or advanced cryptocurrency investor.
Understanding crypto tax fundamentals
Before we jump into our 5 tips, let’s briefly review the basics of crypto taxes. In Australia, cryptocurrency can be subject to both ordinary income tax and capital gains tax.
Ordinary income tax: When you earn crypto, you’ll recognise ordinary income based on the fair market value of your crypto at the time of receipt.
Transactions subject to income tax include:
Mining rewards
Staking rewards
Interest rewards
Capital gains tax: Cryptocurrency disposals are subject to capital gains tax. You’ll incur a capital gain or loss based on how the price of your crypto has changed since you originally received it.
Transactions subject to capital gains tax include:
Selling cryptocurrency
Trading one cryptocurrency for another
Using crypto to purchase goods and services
When you hold your cryptocurrency for longer than 12 months, you may be eligible for a 50% capital gains discount.
1. Understand the distinction between trader and investor
If you’re an intermediate investor, you should take steps to understand whether you are considered a ‘trader’ or an ‘investor’.
According to the ATO, the following factors are used to determine whether you are a trader or an investor:
the nature and purpose of your activities
the repetition, volume and regularity of your activities
whether your activities are organised in a business-like way
the amount of capital invested.
Remember, traders and investors are subject to different tax rules.
Investors: When you hold cryptocurrency for longer than 12 months, you can claim a 50% long-term capital gains discount. However, you cannot deduct expenses related to cryptocurrency trading.
Traders: Traders are considered to be running a business, and therefore have the ability to deduct expenses related to their trading activities. However, all your profits from cryptocurrency are subject to income tax. If you are considered a trader, you cannot claim the 50% long-term capital gains discount.
The line between a ‘trader’ and an ‘investor’ can be tricky to understand, as the determination depends on various factors and your specific circumstances. You should always consider consulting a tax professional.
2. Treatment of gas fees
In certain cases, gas fees and transactions can be added to the cost base of your cryptocurrency, and therefore potentially reduce your tax bill!
To better understand how this works, let’s take a look at an example.
Lana buys $400 of BTC and pays $15 in transaction fees.
Later, she sells her BTC for $500.
After accounting for transaction fees, Lana’s cost base is $415.
Lana incurs a capital gain of $85 (500 - 415).
You should keep records of all of the gas fees associated with your transactions. Note that only certain gas and transaction fees may be added to the cost base depending on the nature of the transaction.
3. Understand staking rewards
Many cryptocurrency investors stake their assets as a way to earn passive income.
If you’re staking cryptocurrency, it’s important to understand the tax rules and keep accurate records of income and capital gains.
Staking rewards are generally subject to income tax upon receipt and capital gains upon disposal.
Income tax: You’ll recognize income based on the fair market value of your crypto rewards at time of receipt. Many tax advisors argue that ‘time of receipt’ occurs when you can freely withdraw and transfer your staking rewards.
Capital gains tax: When you later dispose of your rewarded cryptocurrency, you may incur a capital gain or loss depending on how the price of the crypto has changed since you originally received it.
To accurately calculate your income and capital gains from staking, you’ll need to keep records of your staking rewards at the time of receipt and the time of disposal. Failing to keep records can make accurate tax reporting difficult!
4. Claiming cryptocurrency losses
In Australia, cryptocurrency losses can be used to offset your capital gains, potentially reducing your overall tax liability.s Let’s take a look at an example:
Jon has $10,000 in capital gains for the year.
He sells his BTC at a $2,000 loss.
Jon’s net capital gain for the year is reduced to $8,000.
If you have a net loss for the year, it can be carried forward to offset future capital gains. However, it’s important to note that losses cannot be offset against ordinary income.
Wash sale rule: The ATO has guidelines to prevent investors from selling cryptocurrency to claim losses solely for tax benefits. If you sell crypto, claim a capital loss, and then buy back the same asset shortly afterwards, your capital loss may be disallowed.
The ATO guidelines do not specify a specific timeframe for when a transaction would be considered a ‘wash sale’. Nonetheless if you sell and repurchase the same asset for the primary purpose of claiming capital losses, you may well fall afoul of the wash sale rule.
5. Understand crypto donations
Crypto donations can be a great way to contribute to meaningful causes. However, the tax rules around crypto donations are complicated.
In Australia, donations of cryptocurrency to a registered charity may trigger two tax events: a taxable disposal (a capital gains event) and a tax deduction.
Capital gains tax for donations: Donating cryptocurrency is considered a disposal, meaning that you may incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Deduction for donations: You may be able to claim a tax deduction for the fair market value of your cryptocurrency at the time of the donation, provided the charity is recognised as a Deductible Gift Recipient (DGR) by the ATO.
Crypto donation example:
Andy buys $5,000 of BTC.
The value of his BTC rises to $6,000.
Andy donates his BTC to a registered charity.
Andy recognizes a capital gain of $1,000 and may also claim a tax deduction of $6,000, provided the charity is a DGR .
It’s important to remember that to claim a deduction, the organisation that you’re donating to should be considered a DGR by the ATO.
Conclusion
No matter how much time you’ve spent in the cryptocurrency ecosystem, trying to report your taxes can be a time-consuming process.
Crypto tax software like CoinLedger can help. With CoinLedger, you can connect your wallets and exchanges, automatically import your transactions, and generate a crypto tax report in just minutes.
Get started with CoinLedger today and use the discount code ‘OKXAU3’ for 30% off your next tax report purchase!
Remember, software like CoinLedger is not a replacement for professional tax advice.
About the Author
Dhiraj Nallapaneni is a Content Marketing Manager and Cryptocurrency Tax Writer at CoinLedger. As an Economics degree holder from the University of California Santa Barbara, he’s well versed in topics like cryptocurrencies, markets, and taxation. Dhiraj has been deeply involved with the cryptocurrency ecosystem since 2017 and has been writing about crypto tax-related topics at CoinLedger since 2021.
OKX Disclaimer: This is a guest post written by CoinLedger, a provider of cryptocurrency tax tools. The views and opinions expressed in this post are solely those of the author and do not necessarily reflect the views of OKX. The content provided in this post is for general informational purposes only and does not constitute financial, tax or legal advice. Please consult with a qualified professional before making any decisions related to your crypto assets or tax obligations.
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