Australian Tax Office is one of the very few taxation departments that have been proactive in issuing guidelines to individuals involved in the trading of Cryptocurrency. However, 2020 has seen another step from the ATO which demands the immediate attention of all bitcoin traders.
During the month of March 2020, ATO was reported to launch the biggest taxation campaign on Cryptocurrency. Since then, Australian taxpayers have received notices regarding trading of Cryptocurrency, encouraging them to report their capital gain/loss through these transactions.
The Australian regulations on taxation of Cryptocurrency is similar to the existing US rules enforced by the IRS. However, there is a noticeable distinction between the approaches for implementation. While the IRS targeted significantly larger Cryptocurrency traders for taxation, the focus group of ATO is virtually anyone who has traded in the same. Its US counterpart wishes to justify the costs of implementation with the taxes gained from these high returns. However, the ATO has sent out warning letters to over 350,000 Australian citizens.
The ATO regards Bitcoins and other forms of Cryptocurrency as a form of asset, and hence, subject to capital gains tax or income tax. This allows the ATO to tax the sale, exchange or conversion of crypto holdings into real currency or assets. The ATO seems to be following US policies, as the letters sent out by the ATO resembles IRS letter 6174 and 6174-A, and keeping records of transactions are essential.
Crypto assets are taxed according to the activity conducted using tokens. Most transactions fall under capital gains tax, which is charged on the profit gained or loss incurred in a trade. Income Tax is charged on the fair market value of tokens recieved, To give an example, if you mined tokens worth $1000 on the market, and later sold them for $1500, you will have to pay income tax on $1000, and capital gains tax on the profit, $500. However, tokens bought and then sold for a profit only incur capital gains tax on the net profit/loss.
Crypto assets and profit may bet treated as a business or as personal income, and there is a the classification is fuzzy at best. There are circumstances where Crypto transactions are considered as business, where it will be taxed for income. This incli=udes scenarios where assets are traded professionally, mined commercially or transacted for businesss purposes. Operating businesses involved in crypto assets also lead to income tax. However, any activity that does not include these four will be seen as a personal asset and taxed for investment . In situationswhere the activityseems to fall vaguely into both, the ATO will consider the nature of activity, whether there was a business plan involved, and commercial viability to differentiate.
Any activity that leads to capital gain will be subjected to CGT. This includes disposal of cryptocurrency by sales ot gifting, exchange for other crypto or fiat currancy or trade for goods and services. All these are subject to change in tax rate or tax in general depending on various conditions. Here are the general rules and exceptions that may apply to CGT.
Buying Crypto as an investment and selling it later will result in CGT incurred fo the profit. However, holdings are not subject to taxation even while market value changes, until they are sold. Selling tokens and assets after at least a year of holding also makes the trader eligible for a tax cut of 50%. Similarly, Capital loss resulting from selling Crypto can be reduced from capital gain to pay taxes only on the net capital gain.
CGT also applies in crypto to crypto trading, since ypu are exchanging tokens for other tokens, which are regarded as property. Hence, keeping track of all the crypto transactions made is necessary for calculating net income over the time period. Apps like Cointracker allow you to track such trade and also generate capital gain reports. If the value of recieved tokens cannot be found, taxes are calculated based on market value of the disposed tokens at the time of exchange.
There are situtations where the exchange of crypto tokens will not result in a taxable event. Using tokens to purchase goods and services for personal use is not taxable. Booking hotels or online shopping using cryptocurrency incurs no tax, as long as these are personal expenses. Holders can take advantage of such options to use their tokens without triggering a taxable event. There is also a limit of $10000 for capital gains obtained from personal use assets, which does not get taxed. Below this amount, all such purchases are effectively tax free. However, crypto assets as investment, for business sue and as a profit gaining venture does not come under this umbrella.
It is also possible for the nature of holding to change over time. According to ATO, crypto holdings held for longer periods become less likely to be classified as assets for personal use, and might be considered as investments after a long enough duration. The longer you hold the assets, the more likely they are to be considered and taxed as investment.
The Australian Tax Office has begun following in the footsteps of the IRS of USA in acknowledging Crypto assets as taxable income. This new developments will radically change the dynamic of the industry. By playing your cards right and staying on top of your investments, you can minimize your taxes, saving more on your profits.
To process and navigate through the regulations, we at BearTax have made it easy to consolidate all your trades and generate tax documents as per the guidelines by ATO. Signup and preview your gainloss for free on www.bear.tax