Cryptocurrency has seen increasingly unpredictable and strong growth since 2016, turning previously unsophisticated investors into millionaires and sometimes billionaires. Yet many inexperienced investors do not realise that the profits they have made on crypto is likely subject to capital gains tax (CGT).
CGT can usually only arise when you have both a CGT asset and a CGT event. The ATO view is that cryptocurrency is a CGT asset in Taxation Determination TD 2014/26, and there are very few assets of value that are not CGT assets. The most common CGT event is CGT event A1, which is a disposal of a CGT asset. A disposal includes any type of transfer and in the context of cryptocurrency, includes both coin-to-coin transactions and coin-to-fiat transactions. Other CGT events can arise, such as on changing tax residency or transferring the CGT asset to a trust or company.
The next step is to calculate the cost base, which is what was paid for that particular coin or token, and subtract it from the capital proceeds, what you receive from the transaction. This is often easy to identity with cryptocurrency transactions due to the nature of blockchain technology and websites like etherscan.io.
The result is your capital gain for that transaction. You can then apply any capital losses that you have carried forward from previous years or incurred in the current year.
Individuals and trusts may be eligible to reduce the remaining capital gain by 50% if they have held the asset for more than 12 months. An SMSF can reduce their can by 33 1/3% if the asset was held for more than 12 months. Companies do not get a discount; however, they have a flat tax rate of either 30% of 25% for some small businesses from 1 July 2021.
Importantly, the CGT discount is applied after considering capital losses. You can choose which gains are offset against which losses, such as capital gains that would not get the discount can be used to soak up capital losses.
Contrary to popular opinion, CGT is not a tax – the CGT rules simply deem that an amount calculated is income and subject to regular marginal tax rates. This is important for investors on low income who have significant crypto gains.
There are a number of ways to reduce your CGT. Offsetting capital gains with capital losses, obtaining the CGT discount by holding the crypto for more than 12 months and consider holding cryptocurrency in a company or discretionary trust can help to reduce your CGT cost. The 12-month rule is useful for all longer-term investors, as it gives asset holders a 50% discount on capital gains when they dispose of an asset, provided they have held the asset for at least 12 months.
Some investors will benefit from using structures for both long and short-term investing in cryptocurrency. There are particular legal issues with trusts and companies controlling wallets and a lawyer familiar with cryptocurrency issues is needed. The ATO has cryptocurrency in their sights this year, and in particular, the ATO announced a data matching program for cryptocurrency exchanges. Australian crypto exchanges will be required to provide data to the ATO to assist the ATO to identify taxpayers who may be underreporting or not reporting their cryptocurrency gains properly.