4 tips to streamline your Australian cryptocurrency tax in 2021
Learn the things you need to know about crypto tax in 2021, including the latest guidance shared by the ATO.
While it may not be the first thing that comes to mind when you think about filing a tax return, if you've purchased, sold or traded cryptocurrency in the past financial year, you may need to let the ATO know.
The ATO has recently said that crypto is under the microscope this tax time and is now targeting crypto investors who may not be fulfilling their tax obligations. It's never been a more important time to understand how tax and crypto work in Australia.
According to the ATO, cryptocurrency isn't viewed as a currency at all. The ATO classes cryptocurrency as a property, which means it can be subject to the Capital Gains Tax (CGT) any time the asset is disposed of. Disposing of a crypto means whenever you do the following:
- Sell or gift a cryptocurrency
- Trade or exchange cryptocurrency – including crypto-to-crypto trades and DeFi swaps
- Convert cryptocurrency to a fiat currency like Australian dollars
- Use cryptocurrency to purchase goods or services
If any of these actions earns you a profit, you will have to pay CGT on the gains made. While this may be a disappointing revelation for crypto investors, assets that are held for over 12 months are subject to a 50% CGT discount, which helps soften the blow. So it does pay to HODL.
The ATO taxes cryptocurrency relative to the Australian dollar – so even when trading from digital asset to digital asset, if you make a profit in terms of the Australian dollar, you will have to pay tax.
If that all sounds daunting, don't worry. There are a number of tools available that make calculating your tax obligations a relatively short process. Many will plug straight into your favourite exchanges and do most of the hard work for you. But first, you need to work out a few things.
Figure out if you're an investor or trader
Though many crypto-savvy Australians may immediately think they're a trader, chances are the ATO will see them as an investor.
This is because most entry-level cryptocurrency users simply lack the volume, net worth and planning to be considered as traders.
If you only buy into a few different coins on an exchange like Swyftx, with the majority of your profits coming through the long-term holding of assets, you will be taxed as an investor. Even if you do make crypto-to-crypto trades, unless they are frequent then they are unlikely to be considered as "business-like".
If you're a newcomer to crypto investment, you can breathe a sigh of relief – being taxed as an investor is a simpler process with a far more favourable tax rate.
Simply put, all profits (and losses) reportable to the ATO come under CGT rules.
You may need to provide the tax office with transaction receipts if your exchange doesn't fill it out automatically.
Cryptocurrency traders are essentially individuals or businesses that purchase and sell digital assets to generate a regular income. The ATO has a few defining factors it uses when assessing whether someone is classed as a trader, including the following:
- The nature of the activity (are you trying to turn a profit?)
- The repetition, volume and regularity of the activities (how often and how much do you trade?)
- Whether you're organised in a business-like way (for example, do you have a business plan, business premises, accounts and records of trading stock etc?)
- The amount of capital you've invested
Trader's profits aren't taxed under the CGT, but instead as assessable income. The tax rate on this will depend on which threshold the "business" falls under.
Remember that as an individual, you can still classify as a business (a sole trader) even if you don't employ anyone else. So if you found yourself day-trading regularly over the past year, then you may fall into this category.
Check if your exchange generates a tax report automatically
Manually filling in a tax report can be quite a stressful task. When you consider many investors will be filing their crypto taxes for the first time, the whole process can appear quite daunting.
To save time, brainpower and high blood pressure, it's always worth checking if the exchange you use to buy, sell and trade cryptocurrency can generate an automatic tax report.
Exchanges like Swyftx provide users with the ability to easily process and create a tax report. This is a downloadable .CSV (Excel) document that details transaction values in Australian dollars, opening/closing funds and fee summaries. You can select which time period this data applies to, making it super simple to assess your taxable profits over a financial year.
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Connect crypto tax software to your exchange
As of the past few years, new software has been developed that automatically calculates your tax obligations based on your activity on a supported crypto exchange.
That's right – no more math.
There are two ways of doing this – let's use Swyftx as an example:
Using Swyftx's open API key generator, you can directly connect your account on the exchange to a platform like Koinly or CoinTracker. This is a bit fiddly, so let's have a look at the steps involved.
- First, log in to your Swyftx account.
- Access the API section by clicking Profile > API. Then click "Create new key" on Swyftx.
- Enter in a label (the name of the tax return application you are using), select "Read-only" for scope and then re-enter your Swyftx password to confirm. Voila, you have your key!
- Set up an account on a tax platform like CoinTracker.
- Select "Swyftx" as your exchange from the drop-down menu and then simply copy and paste the provided API key into the platform to connect your accounts. That's it! Your taxes owed will be automatically generated. You can access the information via the "Taxes" tab.
Some tax reporting platforms (such as Koinly) also have in-built CSV functionality, meaning that if your exchange generates a transaction report (see tip #2 above), then this can be uploaded to the tax software to calculate a tax report.
Can you avoid paying tax on cryptocurrency?
Wouldn't it be nice? Unfortunately though, there is no way you can avoid paying tax on cryptocurrency unless you're a big fan of fines or jail time.
That said, there are certainly ways you can minimise how much tax you have to pay on your cryptocurrency assets.
- If you're classed as an investor and you hold a coin for over 12 months, you may be eligible for a 50% discount on your CGT obligations.
- Ensure you keep records of all related expenses as you may be able to claim business deductions if classified as a trader.
- Remember to incorporate brokerage fees and capital losses against gains when calculating tax owing. Losses can be used to offset gains – even those from previous years.
- The single best way to minimise paying tax on cryptocurrency is by hiring a professional tax attorney that specialises in crypto. If you've made substantial capital gains throughout the past financial year, an accountant is likely to be worth the price tag.
With the ATO dropping the hammer on cryptocurrency this financial year, it's extremely important to have a good understanding of how crypto taxes work.
Exchanges like Swyftx have a number of in-built functions that make your journey towards filing a tax report much smoother, but it's still always a good idea to consult an expert if you're spending a lot of money on the crypto market.
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Disclosure: The author owns a range cryptocurrencies at the time of writing
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