The continually changing and expanding crypto world might lead to an unclear tax environment. This article presents the top five traps of Australian crypto taxes that you should beware of. We will clear up some misconceptions about tax issues and other factors related to this asset class.
1. Wash Sale Rule
Although the term “Wash Sale” has no precise meaning, with crypto assets, a wash sale occurs when an investor sells a crypto asset at a loss but buys the same or substantially the same asset in a short period of time. The sale and purchase cancel each other out, resulting in no change in the owner’s economic exposure to the asset, allowing the taxpayer to incur a loss to offset a gain already realized or expected to be realized. This also leads to the taxpayer claiming the loss while being in substantially the same economic position as before the sale, which tax authorities do not like.
Although the ATO issued tax ruling TR 2008/1 that allows them to deny a loss or tax benefit due to a wash sale, its applicability had not been clearly defined as it relates to cryptocurrencies. Tax rule TR 2008/1 defines that the wash sale rule “deals with, a capital gains tax (CGT) asset (the asset) where in substance there is no significant change in the taxpayer’s economic exposure to, or interest in, the asset,” and crypto assets are covered under CGT rules, therefore making the wash sale rule applicable to crypto. The ATO has warned that its sophisticated data analytics can identify wash sales by accessing data from share registers and crypto exchanges. In instances where the ATO identifies such activity, the capital loss is disallowed, which means a greater gain or smaller loss to the taxpayer.
You are allowed to sell your cryptos at a loss if you want to realize any unrealized losses and reduce your taxes, just don’t buy back the same asset making it seem like a tax scheme. While buying a different cryptocurrency should suffice, there are risks if you buy a wrapped version of the same asset or another asset highly correlated to the original asset. We advise you to verify with your accountant on this subject.
2. Personal Use Rule
According to the ATO, if the cryptocurrency you transact with is a personal use asset, a capital gain/loss can be avoided. The crypto asset is considered a personal-use asset whenever it is used to acquire items purchased for less than $10,000 for personal use or consumption. However, this $10,000 personal use asset rule can only apply in the rare instances where the cryptocurrency is acquired and immediately disposed of to purchase personal property or services. If personal goods or services are purchased using cryptocurrency that was initially intended to be held as an investment, the taxpayer will not be able to claim the gains were for personal use. Critical to determining whether it is a personal use asset is the time of disposal of the cryptocurrency. The longer you hold the cryptocurrency, the less likely it is to be considered a personal use asset, regardless of whether you eventually use it to purchase personal consumption products.
3. Internal Transfers
The official ATO guidance on transferring crypto from one wallet to another states that:
“Transferring cryptocurrency from one digital wallet to another digital wallet is not considered a disposal as long as you maintain ownership of it….If your cryptocurrency holding reduces during this transfer to cover the network fee, the transaction fee is a disposal and has capital gain consequences.”
As stated by the guidance, any internal transfers are not taxable events; after all, you are transferring your crypto to yourself. There is a risk, however, that the transfer will show up as a taxable disposal, overstating the taxable gains for the taxpayer. This could happen in a report from a single exchange (as they don’t have a view of who it is being transferred to) or even when generating tax reports with ACCOINTING.com if you have not connected all your wallets and verified your internal transfers. It is critical to connect all your wallets used and verify all internal transfers to have a clean audit trail of your transactions. If not done correctly, to a regulator looking in, it may seem as if you used your appreciated crypto to purchase something, triggering capital gains tax. Transaction fees on internal transfers are taxable disposals as you are reducing your holdings – if you send 1 ETH to a wallet but only receive .9 ETH due to fees, the .1 ETH is a taxable disposal.
4. Crypto Donations and Gifts
Gifting cryptocurrencies is considered a disposal due to the original intention to hold the cryptocurrency, even if no money is exchanged for them. It is, therefore, subject to either ordinary income tax or capital gains tax. Also, remember that even if you donate cryptocurrencies to a deductible gift recipient (DGR) and then claim a deduction, it could be considered a profit-making scheme. Donation of crypto assets to DGRs does not usually involve the payment of capital gains tax when:
- The gift is made under a will (testamentary gifts) – however, you cannot claim a tax deduction.
- It is donated under the Cultural Donations Program.
- Crypto assets donated are considered personal use assets.
The ATO will ask you to keep a record of crypto asset transactions, including the date you donate them and their market value at that time. Fortunately, this information will be automatically kept for you with ACCOINTING.com. You should keep a copy of your tax report, all other files provided (such as the full data set), and a copy of any CSV or excel files uploaded to ACCOINTING.com.
Those receiving the cryptocurrency are not subject to tax when the cryptocurrency is accepted, but if disposed of, capital gains tax will apply.
5. Crypto-to-Crypto Transactions are Taxable
Given that cryptocurrencies are considered digital assets, any crypto-to-crypto transaction is a taxable event. This means that when you exchange or swap a crypto asset for another, you dispose of one CGT asset and acquire another. Thus, a CGT event occurs to your original crypto asset. Since property is received rather than money, the market value of the cryptocurrency must be calculated in Australian dollars. Many taxpayers still believe the misconception that cryptocurrency is only taxable once exiting the markets into Australian dollars. While there is a greater risk of receiving a letter from the ATO when exiting into fiat (as you will have to go through a KYC exchange), every trade is a taxable transaction subject to CGT. You could keep track of all transactions with a spreadsheet, but reporting complex transactions across a number of platforms can be time-consuming and can involve a lot of mistakes when it comes to recording the correct level of detail. ACCOINTING.com has been built to simplify the experience of connecting all your wallets and reviewing your data, allowing you to rely on our software to calculate your taxable capital gains and providing you with a report that is fully compliant with ATO tax guidelines for cryptocurrencies.
The information contained in this article is for general information purposes and does not constitute financial, investment, legal or tax advice. The present content is not intended as a thorough, in-depth analysis, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please consult your tax advisor.