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How To Calculate Capital Gains Tax On Crypto Transactions?

How To Calculate Capital Gains Tax On Crypto Transactions?

Cryptocurrencies have been increasingly adopted as forms of digital assets globally. 

As per the latest report, at least 1 person out of 4 in Australia holds some or the other type of cryptocurrency. 

With such wide-scale adoption, the taxes associated with them can be really confusing. 

KPG Taxation understands this and therefore we want you to know the tax implications associated with buying, selling, trading, or utilising cryptocurrencies. 

So we decided to share a blog that aims to simplify crypto tax for Australian investors by answering your top questions.

First, let’s get started with some basics.

Understanding Crypto Assets And CGT

Before we move ahead, let’s understand some common terms and their meanings.

  • Crypto Assets vs. Cryptocurrencies: “Crypto” is short for cryptocurrency, but for tax purposes, we use the broader term “crypto assets” to encompass all digital assets like coins, tokens, and NFTs.
  • CGT Explained: CGT stands for Capital Gains Tax. It’s the tax you pay on profits made from selling assets, and crypto assets are no exception.

Investor vs. Trader: Are You Taxed Under CGT?

The first step is figuring out if you’re a crypto investor or running a crypto trading business. This difference determines whether CGT rules or income tax rules apply to your activities.

  • Investors: Most people fall under this category. If you buy and hold crypto with the intention of profiting in the long term, you’re likely considered an investor. Your crypto activities will be subject to CGT.
  • Traders: If you’re actively buying and selling crypto frequently, in an organised and “business-like” manner, you might be considered running a business. This means your earnings are taxed as business income, not under CGT rules.

How Crypto Activities Are Taxed?

  1. Does Tax Apply to All Crypto Activities? Yes, most crypto activities are taxable under CGT or as assessable income.
  2. CGT Events: These are instances where you dispose of your crypto and trigger a tax reporting requirement. This includes selling, donating, gifting, trading, swapping, using crypto for goods or services, and even converting it to Australian dollars.
  3. Taxation for Business Activities: If you’re a crypto trader, income tax applies to mining crypto, earning through staking, yield farming, airdrops, getting paid in crypto, and disposing of it as part of your business. Remember to declare staking rewards and airdrops as income, as you’ll pay CGT when you dispose of them.

Calculating Capital Gains Tax (CGT)

Let’s understand how capital gain plays a part in all of this.

  • Working Out Your Cost Base: This is the amount you paid for your crypto, including acquisition costs, holding costs (wallet fees), and trading costs. It forms the base for calculating your capital gain or loss.
  • Didn’t Pay for Your Crypto? If you received crypto for free (e.g., airdrop, yield farming etc.), its market value at the time of receiving becomes your cost base.
  • Gifting Crypto? The market value at the time of gifting becomes the recipient’s cost base.

Capital Gains vs. Capital Losses

In this section, we will understand how these two terms actually play a major role when we talk of crypto-related taxation. 

Capital Gains

If you sell your crypto for more than your cost base, you’ve made a capital gain. Report the total amount on your tax return under the “18H Total current year capital gains” label.

CGT Holding Period And Tax Rates

Holding Period (Since Acquired) Tax Treatment
Less than 12 months Short-term capital gain. Taxed at your marginal income tax rate.
12 months or more Long-term capital gain. Entitled to a 50% CGT discount, reducing your taxable gain by half.

Capital Losses

If you sell your crypto for less than your cost base, you’ve incurred a capital loss. 

You can use this loss to:

  • Reduce your capital gains for the year.
  • Carry it forward to future years to offset future capital gains.
Record Keeping For Crypto Transactions

The importance of record keeping just cannot be overlooked. 

The following are key practices to be ensured:

  • Maintain Detailed Records: Keep a record of every crypto transaction, including the date, value in Australian dollars (use reputable exchange rates), the purpose of the transaction, and the other party involved (or their crypto address). Sources for these records include exchange records, purchase receipts, invoices, and your digital wallet records.
  • Crypto Value in AUD: Report all crypto values in Australian dollars on your tax return. Use reputable exchange rates on the transaction date and keep records of where you obtained the rate.

Temporary Residents And Crypto Taxes

If you’re a temporary resident in Australia and an investor, you generally don’t pay CGT on crypto as it’s not considered Taxable Australian Property (similar to shares). However, you still need to report income related to crypto investments, like staking rewards and airdrops.

Crypto Scams, Network Bankruptcy, And Capital Losses - Important!

Let’s understand some crucial pointers in detail which can impact crypto taxation:

Victim Of A Scam?

If you lose access to your crypto due to a scam and cannot recover it, you may claim a capital loss. You’ll need evidence of the lost access date and proof of ownership.

Network Insolvency

If you lose access to crypto because a crypto exchange or platform becomes insolvent, you might be able to claim a capital loss on your worthless crypto. 

However, you can only do this once the liquidator or administrator declares in writing that you won’t receive any further distribution or income. This may take time, potentially a year after you lose access.

Key Takeaways

Understanding crypto tax in Australia might seem complex, but this section simplifies the process for investors. 

Remember:

  • Identify yourself as an investor or trader. This determines which tax rules apply (CGT or income tax).
  • Track CGT events. These include selling, gifting, or using crypto, and trigger reporting requirements.
  • Calculate your capital gains or losses. Use your cost base (including acquisition and holding costs) to determine the gain or loss.
  • Hold for at least 12 months. This qualifies you for the 50% CGT discount, reducing your taxable gain.
  • Keep detailed records. Track transactions, dates, values in AUD (using reputable exchange rates), and counterparties.
  • Report your crypto activities. Declare capital gains and losses, staking rewards, and airdrops on your tax return.

And if you are stuck on crypto-related taxation or unsure about how capital gains would impact your crypto transaction, you can consult expert tax accountants at KPG Taxation who can help you with the correct advice so that you can avoid any taxation-related blunders. 

Consulting with KPG Taxation

Focus On Growing Your Business, Leave The Accounting On Us!

  • Income Tax : File your taxes & get the best claims & returns.
  • Accountancy : Hire expert accountants to manage your transactions.
  • Bookkeeping : Let us handle your record books and expense reports.
  • Business Advisory : From company set-up to payroll, we handle it all.