With the phenominal rise in the market, tax on crypto is causing a fair amount of uncertainty amongst many crypto traders, the ATO and advisors. Regulators have had to try to keep up with a fast-moving industry and information and guidance to date is broad and leaves many issues unclear. Part of the problem is that we have tax laws which were often written in the 80’s or earlier and we need to apply them to the modern phenomenon of crypto. This leads to a situation where current laws are arguably not ideally suited to deal with the unique characteristics of the crypto market.
The purpose of this article is to address some issues and FAQ’s which have arisen in recent times and to offer thoughts on theoretical ways crypto profit/gains could be ideally treated with regards to tax.
If I hold my crypto for more than 12 months I can trade and receive the 50% CGT discount right?
The ATO has indicated in guidance that crypto assets (only bitcoin is stipulated) may be treated as investment (subject to capital gains) in some cases, whilst in other cases may be treated as income from business or a profit making scheme (taxed as income). The argument for each is still blurry and untested for crypto , however it appears likely that a significant number of crypto traders will be classified as a business or speculator. Business and speculative profits are taxed as income with no CGT concession available regardless of how long the coin is held.
Some crypto traders might find it surprising that their trading will be considered as a business or speculation with gains taxed as a income rather than investment. There has been conjecture lately that it might be difficult to argue that crypto buys in general are held on capital account rather than revenue. The ABC recently ran a story on this which can be accessed here. A good article on investors vs speculators via CoinSpot is here.
Reasoning as to why crypto assets may not be considered to be investments includes the argument that investment assets are generally held for long-term capital appreciation and often pay returns in dividends/rents etc. This argument appears to ignore however that some crypto’s do actually make dividend-like payments. NEO holders receive GAS, TaaS holders receive dividends in ETH, VET holders will receive dividends in THOR and PoS or dPoS coins can be staked for a return. This could indicate that holdings in these types of coins are more likely to have the nature of an investment rather than as speculative trades. Other coins with no dividend-like return may be more likely to be considered as ‘speculative’ trades.
In any event, it will be important to have a record of the reasons and intent behind trades. As well as keeping records of the reasons/intentions for purchasing particular assets, it may be beneficial to consider the function of the coin as well.
I haven’t cashed out to Fiat yet. Are my trades taxable?
One question which has come up a lot in recent months is whether crypto to crypto trading is taxable even where no amounts have been cashed out to fiat currency. There has been no direct answer from the ATO to this question to date and the ATO could not answer this question when we contacted them directly with this question. It was advised that a private ruling would be needed to be sought for a detailed answer (private rulings only apply to a particular case and can’t be applied generally). So it appears we are still at very early stages in policy with no clear answers. A recent article in Smart Company also discusses where the ATO is currently at with regards to crypto policy.
Guidance issued by the ATO states that Bitcoin is not considered a foreign currency but rather a commodity with trading akin to barter transactions. Barter transactions are valued at market rates and taxed at the time of the sale. This would indicate that crypto to crypto trading may be viewed by the ATO as a taxable transaction. It is likely prudent to assume that gains on crypto to crypto trades are taxable and plan accordingly until further information is available.
I have trades going everywhere across multiple exchanges! What’s my gain??!!
Assuming tax is payable on crypto to crypto trading gains, a relatively simple formula to work out the taxable (realised) profit from a crypto trading business over any given period of time might be:
TAXABLE GAIN = PORTFOLIO MARKET VALUE END – PORTFOLIO MARKET VALUE START + UNREALISED PROFIT START – UNREALISED PROFIT END + FIAT WITHDRAWALS – FIAT CONTRIBUTIONS
Here unrealised profit is the difference between the market value and the purchase cost of assets held at a particular time. FIFO would likely be the correct method to determine which coins/tokens are held. A service such as CoinTracking could be used to help with these calculations.
What if I don’t cash out to Fiat after 30 June and the market crashes?! Do I still have to pay all tha tax??
This concern has been voiced by several people I’ve spoken to recently, as there is the possibility that a significant realised gain could exist at 30 June with all holdings still being in crypto rather than fiat. Given the crypto market’s volatile nature, if the market were then to take a significant downturn after 30 June but before tax is due, the taxpayer could be left with a large tax liability but no funds with which to pay. This outcome would seem to not be in the interest of either the tax office or the tax payer.
No clear solution is available at this point in time to this conundrum based on current tax laws and ATO information to date. It would likely be a good idea to set aside funds at or soon after 30 June based on calculated tax liability and your risk tolerance to guard against the risk of a market down turn.
So how could tax be applied to crypto profits in an ideal world?
One possible solution which comes to mind would be to express the profit and tax liability in a denomination of crypto rather than AUD. For simplicity say Bitcoin. In this case say at 30 June profit was 100 BTC and tax 30 BTC assuming tax is 30%. Were the market then to crash, the tax liability of 30 BTC in AUD would fall with the market and the taxpayer wouldn’t be significantly disadvantaged. Conversely, were the market to rise the ATO would benefit as the liability in AUD would rise presumably in line with the tax payer’s portfolio.
There would be an issue if crypto was withdrawn to Fiat after 30 June and there was a significant market movement prior to tax payment date. In the event of a crash the tax payer would benefit whilst the opposite would be true if the market were to significantly rise.
To counter this, the BTC/AUD price when cashed out could be fixed on that date. Say 1 BTC = $10,000 on Fiat conversion date. If 20 BTC were cashed out at this price and the price drops to $1,000 by tax due date, the taxpayer would then pay tax of 30 BTC : 20BTC x $10,000 = $200,000 AUD for the cashed out portion and 10 BTC x $1,000 = $10,000 AUD for the crypto portion TOTAL = $210,000 AUD. If they wanted to be really progressive could the tax office could even accept tax payments for crypto directly in BTC? This would likely be a way off but we will watch on with interest.
The above scenario is of course hypothetical and doesn’t solve the problem of what to do for the here and now. With luck we will receive further guidance shortly regarding the ATO’s stance. In the mean-time traders will need to manage market risk as best they see fit and plan for any tax payable on gains. Talk to your advisor and seek a private ruling if you need more certainty.
This article is intended as general in nature and to promote understanding and discussion. It doesn’t consider individual circumstances. Individuals should consult with a tax professional prior to lodging their return. We are available via appointment to assist with guidance for your particular situation.