Crypto Tax Deductions: What Investors Need To Know

Cryptocurrency is treated as an asset by the Australian Tax Office (ATO) and is therefore subject to capital gains tax (CGT). This means that you need to declare any transactions involving cryptocurrency on your tax return. CGT applies when you dispose of your cryptocurrency by selling, trading, gifting, or using it to buy goods and services. The amount of tax you pay depends on your income tax rate, but you may be eligible for a 50% CGT discount if you've held the asset for over 12 months. It's important to keep records of all your crypto transactions, including the date, value, purpose, and who the other party was. While the ATO's guidance on cryptocurrency tax has been consistent, it's still an evolving area, and it's recommended that you seek professional advice to ensure you're meeting your tax obligations.

Crypto investments and capital gains tax

Crypto investments are subject to capital gains tax. This means that when you dispose of your cryptocurrency, you will need to pay tax on any gains you have made. Disposing of cryptocurrency includes selling, gifting, trading, exchanging, or using crypto to buy things. The amount of tax you will pay depends on how long you have owned the crypto and your income. If you owned the crypto for one year or less before disposing of it, you will pay short-term capital gains tax, which is typically higher than long-term capital gains tax.

In some cases, cryptocurrency can also be taxed as income. For example, if you receive cryptocurrency as payment for goods or services, it will be taxed as income according to your income tax bracket. Similarly, if you earn cryptocurrency through mining or staking, it will also be taxed as income.

It is important to keep track of your cryptocurrency transactions and report them to the relevant tax authorities. In the United States, taxpayers are required to report crypto transactions to the IRS, and in Australia, the ATO is actively tracking cryptocurrency transactions and has been sending letters to crypto investors reminding them to declare their crypto gains. Failing to declare crypto gains can result in penalties and interest on the outstanding tax liability.

Crypto tax for investors vs. traders

Crypto investors and traders are taxed differently, and these differences are important to understand to ensure compliance with tax laws. In general, crypto investors are taxed on capital gains, while crypto traders are taxed on income.

Crypto Investors

Crypto investors are individuals who buy and sell crypto as a personal investment stock with the goal of gradually building wealth over an extended period. Crypto investors need to consider capital gains tax (CGT) when they dispose of their cryptocurrency. A disposal refers to any time crypto ownership is transferred, including selling, swapping for another cryptocurrency or spending crypto on goods and services.

If investors hold their crypto for at least a year before disposal, they are often eligible for a 50% discount on any capital gain. The amount of tax paid on a crypto gain depends on individual tax circumstances, and it is recommended to seek advice from a registered tax agent.

It is important to note that even if a loss is made on a crypto investment, it still needs to be reported on a tax return. Reporting losses can be beneficial as they may be used to claim a capital loss and reduce taxable income.

Crypto Traders

Crypto traders are individuals who actively generate an income from crypto and operate from a business setup. This includes those running a crypto trading, forging, or mining business, regularly buying and selling crypto for short-term gains, or operating a crypto exchange.

Traders pay taxes on profits as income. Any expenses incurred as a result of the trading activity may be allowed as a deduction. Similar to investors, if a trader receives crypto as payment for goods or services, they will need to record the value of the crypto in their local currency as part of their ordinary income for tax purposes.

Record-Keeping

Regardless of whether an individual is a crypto investor or trader, it is essential to maintain detailed records of all crypto transactions. This includes information such as the date of each transaction, the amount in the local currency at the time, details of the transaction, and any associated expenses.

Crypto Tax Software

Due to the complex and evolving nature of crypto taxes, many individuals turn to crypto tax software to automate the tax reporting process and ensure compliance. These software solutions integrate with exchanges, wallets, blockchains, and decentralised finance (DeFi) protocols to generate necessary tax reports.

Crypto tax record-keeping

• Transaction Records: Keep a record of the date, value in local currency, purpose, and recipient address for every transaction. This includes purchases, sales, trades, exchanges, conversions, gifts, and any other type of disposal.
• Receipts and Proof of Cost: Keep receipts or other proof of the cost of your crypto assets when bought, transferred, or disposed of. This helps establish your cost basis for calculating capital gains or losses.
• Wallet Records: Maintain digital wallet records, keys, and any associated software costs related to managing your crypto and tax affairs.
• Agent, Accountant, and Legal Costs: Keep records of expenses related to seeking professional advice or services for your crypto transactions and tax obligations.
• Mining Records: If you are a cryptocurrency miner, keep records of hardware purchases, mining pool contracts, expenses, and any other relevant documentation.
• Duration of Record-Keeping: It is recommended to keep these records for at least 5 years from the date of the transaction or the year in which a capital gains tax event occurs.
• Language and Format: Ensure that your records are in English or can be translated. They can be maintained electronically or on paper.
• Use Crypto Tax Software: Utilize a reputable crypto tax calculator or software to help you track your transactions, calculate capital gains or losses, and generate tax reports. These tools can sync with your exchange and wallet accounts, making record-keeping more efficient and accurate.
• Export Transaction History: Regularly export your transaction history from exchanges or wallets as a safeguard against potential loss of access to your accounts.
• Blockchain Explorers: In the event of lost records, you can use blockchain explorers or contact crypto exchange customer support to help recreate transaction data.

Crypto tax exemptions

• In some countries, crypto is considered a capital gains tax (CGT) asset, which means that CGT applies when there is a disposal of the cryptocurrency. A disposal can include selling, gifting, trading, or using crypto to buy goods and services. However, there are usually thresholds or limits for CGT to apply, and if the transaction is below a certain value, it may be exempt. For example, in Australia, transactions involving bitcoins are exempt from CGT if they are used to pay for goods or services for personal use and the cost of the bitcoins is below a certain threshold.
• Transferring crypto between your own wallets is generally not considered a taxable event, and you don't have to pay taxes on these transactions. However, it's important to keep track of the original cost of the transferred coins for record-keeping purposes.
• In some countries, hobby-level crypto mining may be exempt from taxes. For example, in Australia, if you are mining crypto as a hobby and not as a business, the rewarded coins are subject to CGT, but there are no income taxes or deductions allowed.
• In the United States, there have been legislative efforts to exempt small crypto transactions from taxation. The "Virtual Currency Tax Fairness Act of 2020" proposed exempting realized crypto gains under $200 from taxation. This would simplify the tax burden on day-to-day crypto users who currently have to report even marginal capital gains.
• Donating crypto to registered charities or deductible gift recipients (DGRs) may be tax-exempt in some countries. For example, in Australia, donating crypto is tax-deductible if the organization has DGR status, and you won't have to pay capital gains taxes on the donation.
• In some cases, receiving crypto through airdrops or hard forks may be tax-exempt. For example, in Australia, initial allocation airdrops are not considered ordinary income and are therefore tax-free. However, if you later sell or dispose of the airdropped coins, you will need to pay capital gains taxes on any profits.

Crypto tax for businesses

The tax implications of cryptocurrency for businesses depend on the nature of the business's activities and the jurisdiction in which it operates. Here is an overview of crypto tax considerations for businesses:

• Classification of Crypto Assets: Crypto assets are typically classified as property or capital assets for tax purposes. This means that capital gains taxes may apply when crypto is sold or exchanged, and purchases made with crypto may be subject to sales or value-added taxes.
• Record-Keeping: Businesses dealing with cryptocurrency must maintain thorough records of all transactions, including dates, amounts, and the value of the cryptocurrency in fiat currency at the time of the transaction. This is crucial for calculating tax liabilities and ensuring compliance with regulations.
• Taxable Events: Businesses need to be aware of what constitutes a taxable event in their jurisdiction. In general, buying crypto is not a taxable event, but selling, trading, or exchanging crypto, receiving crypto as payment for goods or services, and mining or staking crypto are often considered taxable events.
• Tax Rates and Calculations: Crypto tax rates vary depending on the jurisdiction and the business's income tax bracket. Short-term capital gains, typically for assets held for a year or less, are usually taxed at ordinary income tax rates. Long-term capital gains may be eligible for reduced tax rates.
• Crypto-to-Crypto Transactions: Exchanging one cryptocurrency for another is generally considered a taxable event, and the gain or loss on the transaction needs to be calculated and reported.
• Fees and Expenses: Fees incurred during crypto transactions may have tax implications. Fees associated with the acquisition or disposition of crypto assets can often be included in the cost basis for tax calculations. However, transfer fees between wallets or accounts may not provide tax relief.
• Crypto as Payment: Accepting crypto as payment for goods or services can have tax implications for businesses. The fair market value of the crypto received should be recorded, and any gain or loss on the transaction may be subject to capital gains tax.
• Crypto Mining and Staking: Crypto mining and staking activities may be taxed differently depending on the scale and nature of the operation. Small-scale or hobby mining may be tax-exempt, while large-scale mining businesses may need to pay income tax on mining rewards and capital gains tax on the subsequent sale of mined coins.
• Crypto as Investment: Businesses that invest in crypto rather than actively trading it may have different tax considerations. Holding crypto as an investment may qualify for long-term capital gains tax rates, and any losses may be deductible.
• Reporting and Compliance: Businesses must comply with crypto tax reporting requirements in their jurisdiction. This may include filing specific forms, such as Form 8949 in the US, and ensuring that tax payments are made on time.
• Jurisdictional Differences: Crypto tax regulations vary across countries. Businesses operating in multiple jurisdictions should be aware of the specific rules and regulations in each country to ensure compliance and optimize their tax position.

Overall, the tax implications of cryptocurrency for businesses can be complex and vary depending on the specific circumstances. Businesses should seek advice from tax professionals familiar with crypto tax regulations in their jurisdiction to ensure compliance and optimize their tax strategies.

Frequently asked questions