Experts warn about crypto pitfalls at tax time

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on November 04, 2021 Fact Checked
Experts warn about crypto pitfalls at tax time

With CBA now offering trading of cryptocurrency, tax experts are urging Australians to learn how this will impact their tax return.

Crypto can now be traded through CBA's Netbank app, making it more accessible to everyday Aussies.

H&R Block Director of Tax Communications, Mark Chapman, said the ease of transacting cryptocurrencies can make it easy to forget about tax implications.

"Customers may find it easier to trade with Crypto through this new online platform offered by the Commonwealth Bank but it is also offers the unwary investor yet another opportunity to get their taxes wrong in relation to their investments, or to overlook them altogether," Mr Chapman said.

"As a reminder, any investment in cryptocurrency comes with a potential CGT liability, whether you’re selling and converting your profits to Australian dollars or whether you are getting out of one cryptocurrency to invest in another."

Just like other investments, cryptocurrency is subject to capital gains and losses. 

What is Capital Gains Tax?

Capital Gains Tax 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, but this can potentially be discounted by 50% if you hold your cryptocurrency for more than 12 months," Mr Chapman said. 

This is how your capital gain is calculated:

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.

Then discount the gain.

Individuals are entitled to a 50% discount but 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 and is subject to tax at your marginal rate.

The associated legal and professional costs to set up a sole trader business are minimal and the business has no separate legal existence from its owner, meaning you are responsible for all the liabilities of your business.

What happens if I make a loss?

According to H&R Block, if your sale proceeds are less than your cost base, then 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, but not against any other form of income.

Common mistakes

Adrian Raftery, AKA Mr Taxman, told Savings.com.au the most common mistake that people make is not declaring any crypto in their tax return.

"People seem to think that if they don’t cash out but merely keep all the trading within their exchange wallet that there is no tax issue – this is wrong because each time you dispose of one type of crypto, this is a CGT event and needs to be declared, no matter how small it is," Mr Raftery said.

"The ATO’s interpretation on the tax treatment of cryptocurrency is slowly evolving as transactions in cryptocurrency become more and more common.

"Although it does vary from crypto to crypto, the ATO’s view is that they are neither 'money' nor 'currency' but rather 'property' and are assets which are taxable under CGT regulations.

"A CGT event occurs when you dispose of your cryptocurrency. If you make a capital gain on the disposal of a cryptocurrency, some or all of the gain may be taxed.

"Certain capital gains or losses that arise from the disposal of cryptocurrency that is a personal use asset may be disregarded."

'Personal use' traps

Capital gains you make from personal use assets acquired for more than $10 000 are taxable for CGT purposes.

Many traders fall into the trap of thinking everyday trading can be deemed as 'personal use', thus not having to pay CGT for transactions under $10,000.

However Mr Raftery details the true definition of 'personal use' in the eyes of the ATO.

Cryptocurrency is not a personal use asset if it is acquired, kept or used:

  • As an investment
  • In a profit-making scheme
  • In the course of carrying on a business

This means, for the average investor, cryptocurrency would be considered 'an investment' and needs to be treated as such at tax time. 

Record Keeping

Maintaining detailed records is very important to prove your transactions and associated expenses.

Your records must include:

  • The date of the transactions.
  • The value of the cryptocurrency in Australian dollars at the time of the transaction (this can be taken from a reputable online exchange).
  • The purpose of the transaction and the details of the other party (even if
    it’s just their cryptocurrency address).

Types 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.
  • Software costs related to managing your tax affairs.

Savings.com.au recommends seeking out professional advice when it comes to tax time and this should be used as a general information piece, not individual tax advice. 


Image by Executium via Unsplash

Disclaimers

Savings.com.au does not provide tax advice. This material has not been prepared by Savings.com.au and is for informational purposes only, and is not intended to provide, and should not be relied on for tax advice.

For tax advice relevant to you, visit the ATO or consult an independent tax advisor

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Aaron joined Savings.com.au in 2021. He is a finance journalist with a keen interest in property, the share market, and improving financial literacy in young Australians.

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