Nothing Crypto About Taxes

As the bell rings for the end of one financial year and the beginning of another, another bell tolls to remind us to do our taxes. It seems only yesterday that we trawled through our folders, filing cabinets and inboxes to gather and collate our data, and as sure as the sun rises and falls, the tax office wants its share.

While crypto and digital assets may represent an emerging financial technology, they’re still subject to the usual laws and regulations related to income and capital gains. Anyone who exchanged crypto for cash or other crypto, earned a staking reward or dabbled in Non-Fungible Tokens (NFTs) will need to declare their activity in their tax return.

This year, the Australian Tax Office (ATO) has warned that it intends to look closely at crypto transactions, presumably by focusing on its data-matching monitoring activity, which has been in place since 2019. The ATO compares data from crypto and digital asset exchanges subject to its authority with individual tax returns to identify discrepancies. Investors who forget or ignore their crypto activity may not find the ATO so sympathetic as in prior years. And with varying estimates of one to several million Australians who have exposure of one kind or another to crypto, the potential tax revenue is certainly too significant to ignore.

Fortunately, the tax obligations for crypto are not difficult to comprehend and mirror the way other transactions and assets are treated. At a high level, the main rules are:

1. Crypto is not money, which means it is subject to capital gains tax (CGT) when bought and sold, just like any other asset.
2. But, like wages, dividends, rent and other income, earning crypto is subject to income tax.
3. Exchanging crypto for crypto is treated in the same way as selling one asset for cash and then buying another with cash, i.e. it is a CGT event.
4. “Crypto staking” in which crypto is received as a reward is considered income.
5. Business transactions may be treated as trading stock rather than capital gains and losses.
6. Crypto for personal use isn’t subject to CGT, subject to specific conditions.

Capital Gains Tax

The rule most forgotten by crypto punters is #3, and the ATO’s data matching will undoubtedly be looking for crypto-to-crypto trades to capture CGT gains and losses.

Consider a CGT example:

1. Alan buys 1 ETH for $2800.
2. Alan sells 1 ETH for 85 SOL (Solana).

Alan’s sale of ETH in step #2 is a CGT event for the ETH sale. If the AUD-ETH exchange at the time of the ETH-SOL swap is 1:3000, then Alan will have a capital gain of $200 on the sale of ETH. He must declare this capital gain for CGT purposes.

Alan should also record the AUD value of the SOL he purchased, as this will be the cost base for any subsequent disposal of SOL, whether to cash or any other crypto/digital asset. It will be easier to record this value at the time of the swap, as otherwise they (or their accountant) will need to allocate an AUD value later to determine the historical cost-base.

The ATO recognises that many crypto punters are not aware that a crypto swap consists of a sale and subsequent purchase for CGT purposes — so crypto punters beware!

CGT also applies in the usual way for crypto purchased using cash, and also where a blockchain “splits” and results in a new crypto asset being created as a result (any subsequent disposal is a CGT event with a cost-base of zero).

Income Tax

In terms of income tax, the ATO treats at least two crypto events as income tax events. These include:

• Receiving staking rewards or “interest” in crypto, for crypto “staked” or “deposited”.
• Receiving an “airdrop” of crypto as a reward for existing token holders.

Crypto received as an initial allocation for a new crypto project is not treated as income, but any subsequent sale is treated as a CGT event based on a zero cost-base (because no money was paid to an issuer to receive the initial allocation).

SMSF

SMSF trustees must also be aware that the usual rules apply for crypto assets, including:

• Crypto assets must be allowed under the fund’s trust deed and align with a fund’s investment strategy.
• Trustees must separate a fund’s crypto assets with any personal crypto assets, meaning that any crypto/digital assets should be held within separate wallet accounts.
• Crypto assets must be valued at “fair market value which can be obtained from a reputable digital currency exchange or website that publishes its rates publicly”.
• Crypto assets cannot be acquired from any related party (or contributed in specie by members).

The ATO provides a wealth of information related to crypto taxes online (link here: https://www.ato.gov.au/Individuals/Investments-and-assets/Crypto-asset-investments/) and investors would be well advised to familiarise themselves with the obligations.

Tools

Several tools are now available that can assist crypto punters manage their record keeping, such as Crypto Tax Calculator, Koinly or Cryptocate, among others.

These tools often have existing integrations with popular crypto exchanges and can automatically “import” transaction data from user accounts (with user approval of course). They can also import files in Excel or CSV format for those who prefer to maintain their records manually, or where the exchanges can export transaction history.

It’s still the investor’s responsibility to ensure that their records are correct, and I personally have experienced some challenges in configuring these tools to accurately reflect an investor’s total position where multiple exchanges and/or platforms have been used. An old-fashioned Excel worksheet has so far proven to be foolproof, so caveat emptor!

As crypto and other digital assets become ever more widespread, punters and long-term investors should remember that the tax obligations remain long after the bull (or bear) market excitement has disappeared into the rear-view mirror. The ATO has given fair warning that it won’t forget, so investors have been warned.