There’s a good chance you’ve heard about cryptocurrency since it launched over a decade ago and maybe even briefly considered investing in it. But if you’re not clear on what it is exactly and how it all works – don’t worry, you’re not alone.
Put simply, cryptocurrency is any form of digital or virtual currency that uses cryptography to secure transactions so it’s nearly impossible to counterfeit or double spend. It’s also not regulated or centrally issued like traditional currency, so it sits outside of the authority of governments.
But this doesn’t mean that investments in crypto are tax free. Cryptocurrency is still considered an asset (like shares or property) in most cases rather than as currency and it is taxed accordingly, using the Australian capital gains tax system.
How does tax on cryptocurrency work?
When you sell an asset such as cryptocurrency, you need to calculate whether you made a capital loss (meaning you lost money on the sale) or a capital gain (meaning you made a profit), and this will determine the amount of capital gains tax to be paid.
To do this calculation, you simply subtract the cost base of the amount of cryptocurrency you are disposing of (meaning the amount you paid in AUD to acquire it in the first place, including any transaction fees) from the sale price of the cryptocurrency (also in AUD). This will give you either a capital gain or a capital loss.
If you are doing multiple sales, you might be able to add these gains and losses together and work out an overall net capital gain or loss.
If you have made an overall capital gain, this amount is then added to your regular assessable income (rather than settled as a separate tax) during the year you sell the asset, and the amount of tax you’ll pay will be based on your marginal tax rate in that specific year. If you have made a loss, this cannot be deducted from your other income. If you have made other capital gains (for example, from the sale of shares or other assets) you can deduct the crypto loss from these gains. Any losses that are not able to be deducted this year will be recorded and carried forward to be claimed against gains made in the future.
One very important thing to know is that you can get a 50% capital gains tax discount if you are an individual or trust and you hold your asset (in this case, your cryptocurrency) for more than 12 months before selling it.
What does this look like in the real world?
Imagine you decide to buy $10,000 of cryptocurrency and keep it for 24 months before selling it for $25,000 in the 2025 year. This means your capital gain is $15,000. But the good news is that you owned the cryptocurrency for more than 12 months, so you only need to pay tax on $7,500. This amount will be added on to your assessable income which, in this imaginary example, let’s say is $75,000. This means your total assessable income is $82,500 and your tax rate (including medicare) is 32%. To work out the capital gains tax owed on just your cryptocurrency sale, multiply the profit by the tax rate: $7,500 x 0.32 = $2400
Ways to dispose of cryptocurrency
Selling your cryptocurrency is not the only way to dispose of it, and you might also want to consider trading or swapping it for another currency, using it to buy goods or services or even gifting it to another person. But regardless of how you dispose of it as an individual or trust, you still need to calculate and pay tax on any capital gains.
It is worth noting that if you receive cryptocurrency as a gift, you should record the value of it when you receive it in AUD and use this as the cost base for whenever you decide to dispose of it.
Also if you dispose of cryptocurrency as part of a business you carry on rather than an investment, for example if you run a cryptocurrency mining business, then the profits you make on disposal will be assessable as ordinary income and not as a capital gain.
The only other capital gains tax exception you need to know about is if you donate your cryptocurrency to a registered charity or organisation, as this is recognised as a tax-free event. You’ll still need to calculate any capital gain at the time of the donation but this value will then function as a deduction on your tax return.
Can I get help managing taxes for my cryptocurrency assets?
If any of this sounds confusing, then relax because the team at H&R Block are experts at managing taxes on cryptocurrency and we would be happy to help you.
Whether you’re trading as an individual or a business, the most important thing you need to do is hold on to all of the records and receipts relating to your cryptocurrency transactions, including any fees paid. We will then be able to help you assess all of your transactions and calculate any taxes owing or owed.
We will help you lodge your cryptocurrency tax application and compute any crypto tax owing, and we will help you reduce your tax liability on any crypto investment if possible by taking advantage of any benefits such as the 50% reduction that you’ll get if you hold on to the cryptocurrency for more than 12 months.
Make an appointment and come and speak to one of our experts today. We’ll make it easy for you, so you can enjoy the benefits of your investment stress-free.
If you have already purchased cryptocurrency or are looking to make a purchase in the future, you’re strongly advised to look beyond the info offered by cryptocurrency exchanges and speak to an experienced tax professional to make sure you stay on top of things, and don’t get on the wrong side of the ATO.
The tax experts at H&R Block are here to help you, so give us a call any time!
