We’ve said previously that cryptocurrency falls under ATO Capital Gains Tax rules. And that’s true, for the most part.
But there are some situations where different rules apply.
In this article we’ll look at the way cryptocurrency tax works, and what tax you can expect to pay on your investment.
Looking to start your cryptocurrency journey? Make sure you seek financial planning advice first.
There are effectively three different types of use for cryptocurrency, and each falls under a different taxation ruling.
- Personal use
- Investing in cryptocurrency
- Trading in crypto
How much tax do I pay on crypto for personal use?
Cryptocurrency isn’t just an investment option. Despite what the current media hype will tell you, it’s actually designed to be used as currency.
So if you hold cryptocurrency and use it purely to make purchases or payments, rather than to generate profit, then this is considered as personal use. In this case, you may not actually be required to pay tax on any cryptocurrency disposal, up to a $10K limit known as the personal use asset exemption. However, check with your financial adviser first to ensure this applies to your situation.
Example
Each month, Sam earns a portion of his salary in Ethereum. He uses his Ethereum to pay for his monthly living expenses, such as phone, internet, and even rent (he has a very forward-thinking landlord). In this circumstance, Sam received and then used his cryptocurrency for personal use, so any gain he made on his Ethereum during the process is not taxed.
How much tax do I pay on crypto as an investment?
It’s likely that investing is the main reason that people get into cryptocurrency. When investing in crypto, unlike other forms of investment, you don’t actually pay any tax on the currency itself while you hold it. You simply hold it, and watch it as the market changes.
It’s only when it comes to disposal of your cryptocurrency that you pay tax on your gains.
When investing, the ATO classes cryptocurrency as a form of property. So therefore it falls under capital gains tax rules. You’re required to pay tax on the profit you made from your sale (total sale price of your cryptocurrency minus original purchase price), commensurate with your personal tax bracket.
So under these rules, you may be looking at quite a large capital gains tax assessment.
The good news is that you can still take advantage of the 12-month 50% CGT discount. So if you hold your cryptocurrency for 12 months or more, you’re then only taxed on 50% of the gain upon disposal.
Example
Sam earns a comfortable AU$130k a year. But he’s heard a lot about cryptocurrency, so he decides to try his luck.
He buys 2 Ethereum coins for AU$2,000 each. He holds them for eight months, watching them closely. At this point they’re now worth AU$6,000 each, so he sells his Etherium, earning AU$12,000 in the disposal.
Sam has made an $8,000 capital gain which he must declare on his annual tax return. Given his earnings, he pays 37% tax, or $2,960, on the full $8,000, leaving him with $5,040 in profit.
But say Sam decides to hold for another four months. He sees the value rise—but then it starts to dip. So he sells his Ethereum at a value of$5,500 each, making $7,000 in profit.
It’s less than if he sold at the peak, but this also means Sam can access the 12-month 50% discount, He now only pays 37% tax on $3,500 of his profit: just$1,295 in tax. He’s actually better off this way, as he still keeps $5,705 in profit after tax.
How much tax do I pay on crypto as a crypto trader?
Some people may start to buy and sell cryptocurrency as a means of generating regular income. If you treat it in a businesslike way and set up an ABN to manage your trades under, this positions you as a crypto trader.
And if buying and selling cryptocurrency is how your business makes profit, then your cryptocurrency gains are taxed differently than if you’re investing. In this situation they’re taxed as part of your assessable income. This also means that you’re able to claim any expenses generated during your crypto trading as tax-deductible business expenses.
Example
After disposing of his Ethereum, Sam gets bitten by the crypto bug. He starts reading heavily about it, getting more and more understanding about how crypto works. He reinvests the money he earned into new investments, selling these as the price increases, and then starts the process again. He realises he’s good at it, so he quits his job, sets up an ABN, and starts trading cryptocurrency full time.
He is now effectively earning $165k a year trading crypto full-time. Therefore his crypto gains are now counted as his taxable income, and he’s taxed at the marginal 37% tax rate. He pays $46,117 in income tax on his crypto. He buys a new laptop, invests in crypto trading software, and gets business cards printed—all of which are tax-deductible, allowing him to reduce his $46,117 tax bill even further.
The final word
The evidence shows that cryptocurrency has the potential to generate sizeable profits. But with these profits come sizeable taxation obligations. So when you’re trying to work out how much tax do you pay on crypto in Australia, it all depends on how you manage your cryptocurrency.
When looking to get involved in the world of cryptocurrencies, we recommend seeking the advice of a professional financial adviser. They can determine the right starting allocation, your appetite for risk, and identify strategies to ensure you meet your financial goals. They’ll also ensure you stay on the right side of your ATO obligations.
