At Bean Ninjas, many of our clients and team members are learning about and investing in cryptocurrency.
Investing in cryptocurrencies brings some unique tax and accounting challenges.
So, we recently attended this EOFY Australian Tax Masterclass session.
In this post, we’re covering the basics that you need to know about Australian cryptocurrency taxes to stay compliant.
*** Please note that this is general information for educational purposes only. The Australian government is in the process of considering and developing responses to various crypto asset issues. And, it’s important that you seek tax guidance from a professional for your individual circumstances.
Current ATO Guidance
As it stands today, ATO regulations are non-binding. However, the primary takeaway is that cryptocurrencies aren’t somewhere to hide. It’s easily tracked, even the ATO can see your entire history since the blockchain itself is even a public ledger. You should not be using manual spreadsheets. You need software for proper tracking.
Remember, all Australian exchanges participate in the ATO data matching program.
While the government is cautious in its approach when responding to developments in Web3 and cryptocurrency, changes can be slow. However, this doesn’t mean you shouldn’t be tracking and reporting your crypto assets.
Senator Bragg’s most recent report in October 2021 spurred a lot of activity we’re seeing now in the regulations space. Further consultations are planned for 2022. This paired with changes in government leadership means we could see impactful regulation changes then.
Currently, there are only two public rulings:
- Bitcoin is classified as a CGT Asset.
- Bitcoin is not a foreign currency.
The rest is up for interpretation. The ATO private binding register is made up of indicative rulings that can’t be relied on. A lot of what we’ll discuss here is our best interpretation with the government guidance we have so far.
Core CGT Issues
Here are some of the primary issues involved with crypto trading:
Coin to coin transactions:
- CGT event: CGT applies on a disposal and crypto to crypto transactions are considered disposals. This can get particularly complex when a third currency is involved.
- Investor vs. trader: Australia differentiates between the two so you’ll need to be aware of this for taxes.
- Complex transactions: Wrapping, bridging tokens, LP tokens for liquidity pools, and rebase tokens add another layer of complication.
- Tornado Cash, Monero, and proof of funds: You’ll need to consider the impact from a tax perception of these.
Gas fees from the Ethereum network:
- Goes on the cost base: For coin-to-coin transactions, you’ll be eligible for placement on both sides. You’ll need to consider gains or losses with disposal. We’re not quite sure where it goes on the cost base because of current regulations. It’s important to keep your records up to date for this reason. Note: Wallet signing fees don’t currently fit into the cost base.
General crypto tax tips
Cryptocurrency can be obtained as a trader, investor, or as income from employers or clients.
1. Figure out if you are trader or investor
This changes how you account for your taxes: an investor is someone that casually invests, but traders are considered to be professional and running their business. Trader accounts for the whole portfolio like a business.
Old regulations (TR 97/11) and a newer but still unclear ruling (TR 2019/1) are used to determine whether you’re an investor or trader. If you want to restructure, seek out professional guidance. This isn’t always easy to define, but your size or scale can help determine which one you fall under.
As we are in a bear market, the ATO will be more stringent about who is considered a trader vs. investor when people try to say they’re traders to minimise losses.
2. Keep accurate records
This should be obvious, but in the same way that you need to keep detailed records of fiat transactions. You also need to do the same for cryptocurrency payments, trades, and withdrawals.
3. Get clear on when you need to classify cryptocurrency as income
If you are getting paid by a client or employer in crypto, you need to classify it as income.
It is also a great idea to discuss crypto volatility with your clients. For instance, given we are in a bear market, if you are paid in ETH, the value of ETH is suddenly halved. For instance, if you used to earn the equivalent of $100 USD per hour and now it is $50 USD. Is that enough to pay the bills and achieve your financial goals?
One way to solve this is to build floor and ceiling prices into your agreement which triggers a rate conversation with your client.
4. File crypto losses
This is particularly important now since crypto is down. If you have lost money trading, it is important to write it off on your taxes.
5. Don’t forget about airdrops
Airdrops are defined as when someone has given you assets for free or in exchange for something like a service. It’s considered a giveaway and has interesting tax implications. The ATO considers this income.
However, there are other types of Airdrops that can appear in your wallet. For instance, someone Airdrops you a token that you didn’t want. It’s considered a gift but is it really income? Some of them are even malicious. They’re scams that can drain your wallet.
Be sure to mark which tokens are Airdrops for your tax software.
6. Put aside money for taxes in stablecoins
First, it triggers a tax event anytime you convert crypto to fiat currency.
Consider whether you will be converting the crypto you earn to pay bills or whether you can keep it in crypto. This will impact your tax obligations.
For instance, assuming a tax rate of 30% you would pay $30k USD on freelance income of $100k.
Now imagine you were paid the $100k as 25 ETH (when the value of ETH was 4k). The price of ETH has dropped to 2k so now it is going to take 15 instead of 7.5 ETH to pay your taxes.
If you had put aside money for taxes in stablecoins when you were paid you would have avoided the risk of not setting aside enough for taxes.
Additional cryptocurrency concepts you should know
The ATO typically views crypto as a CGT asset but staking rewards “generally” as ordinary income. If you don’t tell the truth with your taxes, the ATO can slash your stake.
Staking implications today refer to a non-binding ATO guidance that says staking rewards your income. It’s similar to interest on a bank account. There’s currently an unaccepted argument (Jarret v US) that it’s not income, but simply working to acquire more coins and then profit should be considered when it’s disposed of.
With actual staking via the Ethereum Beacon Chain, tokens are earned for verifying transactions. Keep this in mind – In between every transaction is some virtual amount that’s occurring, so when you receive staking rewards you receive AUD and then go purchase Bitcoin. People don’t often think about the risks from a tax perspective.
The key takeaway: Good tax hygiene is putting cash aside to cover your tax liability. Be prepared for high taxes so you aren’t left scrambling to make enough to cover them when taxes are due.
Bridging and Wrapping
First, let’s define what wrapping and bridging are:
- Wrapping: Where the backend protocol of a network supporting a coin or token gets an upgrade. See Ether (which cannot be used in the Ethereum system) to ERC-20 EHT.
- Bridging: Where two protocols are capable of communicating through either network.
For example, wrapped ETH can be used on non-Ethereum blockchains, Polygon, and Avalanche. At least at the time of this recording.
The big question here is, is there a beneficial change of ownership when you change ownership? It’s not clear-cut, especially with current regulations though the ATO says you are benefiting. There needs to be a deeper analysis to show who has the ultimate benefit of the asset. Be sure to consult with a crypto tax professional.
A novel concept has recently occurred where you can upload a program to the blockchain or global computer that allows you to take two assets and the price of the pool would be based on the ratios of what’s in the pool. This protocol was called uni swap and set off the idea of liquidity pools. They’re an alternative to natural buy and sell orders or a centralised exchange.
A liquidity pool is created by pairing two tokens in equal values such as ETH USDC. If you provide liquidity, you receive fees in the form of further LP tokens. Liquidity pools will result in interesting tax implications. Remember, when you put assets into a liquidity pool your LP token doesn’t always reflect the value of the underlying tokens you put in to get it because the ratio has changed.
NFTs are non-fungible tokens. They’re essentially a signed document that’s one-of-a-kind and secured by cryptography. They brought crypto-native UX into the mainstream. NFTs can be applied to many of the concepts above like wrapping.
NFTs might be considered personal use, but it rides a fine line. For example, some people use NFTs as their social profile picture but then sell the NFT for a profit later. Though it was used personally, it still is considered income.
Crypto, SMSFs and Tax
Crypto and SMSFs have many of the same legal issues that SMSFs deal with plus a few additional ones. First, if you have SMSFs and want to invest in crypto assets then you need to check if it’s allowable under the fund’s deed and in accordance with its investment strategy. Some providers do not allow it. Crypto is not a ‘listed security’ so it will not fall within the related party transaction rules.
The SMSF must have clear ownership of the crypto. Legal documentation is critical for these instances, especially for non-exchange wallets which have no ownership details by default. Remember, you also have to invest in crypto in accordance with ATO valuation guidelines.
One thing to remember is the sole purpose test. SMSFs must be for the sole purpose of providing retirement benefits. SMSFs could make a lump sum payment by way of transfer of crypto. Pension payments must be made in cash, though! Also, CGT applies to crypto transfers, disposals, and investments. There is a 33% CGT discount for holding for more than 12 months.
We expect this space to grow and change, as listed investments now track crypto indexes like Greyscale or DeFi alternatives like $DPI (DeFi Pulse Token). Make sure that you plan well before using SMSFs for crypto.
Derivatives, Margin Trading & Futures
A general rule of thumb is that profits taxed as income and losses are deductible. This applies to futures, options, and leveraged or margin trading. This doesn’t mean you’re carrying on a business, though. It’s a midway category called a ‘profit-making intention.’
Theoretically, a margin trade could be held long-term as a capital asset, this is just very rare. Keep in mind that derivatives can mean a broad class of securities but are also not generally held long term.
Other issues that you can run into
There are many other issues that you can run into with crypto taxes, so this is not an exhaustive list.
- The first one is unexpected to many that run into it. The supply of NFTs doesn’t seem to fit the financial supply definition made for digital currency and some utility tokens don’t either. This is mainly a problem for NFT projects and is an ambiguity with the laws right now.
- The next issue is DAOs and their legal status. An Australian DAO limited liability entity has been proposed and we expect legislation soon, but nothing yet.
- There are many financial service law issues but the most pressing is this: what is a security? This isn’t currently subject to consultation but is expected shortly.
- It’s also unclear whether ESS rules apply to founder token issues, such as when a founder is given cryptocurrency at the start of a business. This will need to be raised with the Board of Tax.
- We also need clarity on investor vs trader for crypto and NFTs. Currently, we rely on share trading information but it’s not definitive. There is still no easy way to determine this. This is unlikely to be resolved formally soon.
Final Strategies for Traders and Investors
You can plan for the future with tax efficient restructures. Broadly, there are two main restructures available for traders and investors. For investors, you can move your investments to a wholly owned company under the subdivision 122-A rollover. This is good for people that have made a lot of money quickly and need to liquidate.
The upside here is a flat tax rate at 30% and access to franking credits. This is much better than the 47% personal tax rate that would have applied! However, the downside is that there is no 50% CGT discount for long-term holdings.
For traders, you can move your investments to a family trust under the subdivision 328-C rollover. The upside is that you can split income flexibility, including a company beneficiary for a 25% tax rate. This does have some complexity. There isn’t much of a downside here.
The key question determining whether to open a company or a family trust is whether you want to carry on the business of trading or not.