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While it should not be the first thing that comes to mind when completing a tax return, one should consider it if one has purchased some.
The ATO (Australian Taxation Office) recently stated that bitcoin is being examined this tax season. It is now pursuing crypto investors who may be failing to meet their tax obligations. While an application with a crypto tax calculator can help, there has never been a more critical time to grasp how tax and cryptocurrency function in Australia.
The ATO does not consider cryptocurrencies to be money at all. It considers cryptocurrencies to be property, which means it is subject to Capital Gains Tax (CGT) if the asset is sold. When people dispose of crypto, they do the following:
- Sell or give a cryptocurrency as a gift
- Exchange or trade cryptocurrency, including crypto-to-crypto transactions and DeFi swaps
- Convert cryptocurrencies to fiat currencies such as Australian dollars
- Purchase products or services with cryptocurrency
If any of these actions results in a profit, one must pay CGT on the profit. The ATO taxes cryptocurrencies to the Australian dollar; therefore, even if one trades from a digital asset to a digital asset, one must pay tax if they make a profit in the Australian dollar.
A crypto tax calculator is available to help one calculate their tax due quickly. But first, one must know the following:
Determine Whether One Is an Investor or a Trader
Although many crypto-savvy Australians may mistake themselves for traders, the ATO is more likely to classify them as investors. Most entry-level cryptocurrency users just lack the volume, net worth, and preparation required to be called traders.
Trader
Cryptocurrency traders are individuals or corporations who buy and sell digital assets to make a consistent income. The ATO employs a few distinguishing elements to determine if someone is a trader, including the following:
- The nature of the activity (is one looking to make money?)
- The frequency, amount, and consistency of the actions (how frequently and how much does one trade?)
- The frequency, amount, and consistency of the actions (how frequently and how much does one trade?)
- Whether they’re organised in a business-like manner (for example, does one have a business plan, business premises, accounts and trading stock records, and so on?
- The amount of money they’ve put up
Connect Cryptocurrency Tax Software to Exchange
There are a lot of new softwares that have been created in recent years that automatically estimate their tax liabilities depending on their activity on a supported crypto exchange. Many applications can be effortlessly connected with the most popular exchanges to help one organise their taxes swiftly and easily.
There are two approaches to this —
- API
A crypto exchange API is a service that allows one to interact with cryptocurrency exchanges. It enables users (either service customers or developers) to interact with bitcoin exchanges, make trades, extract data, and receive data in real-time. Using any software’s open API key generation, one can connect their exchange account to a platform to track their income effectively.
- CSV
CSV (Comma Separated Values) is a data file (akin to a spreadsheet) that one gets from the exchange/wallet and manually imports into ZenLedger. You must extract the CSV records from their exchange/wallet and check that they are properly formatted. Some tax reporting platforms provide CSV functionality, which means that if their exchange generates a transaction report, this may be sent to the tax software to generate a tax report.
Is It Possible to Avoid Paying Taxes on Cryptocurrency?
There is no way to neglect paying taxes on cryptocurrency and repercussions can go as far as heavy fines or jail time.
However, there are paths to reduce the tax one must pay on their bitcoin assets.
- If one is classified as an investor and has held a coin for more than a year, one may be eligible for a 50% discount on their CGT requirements.
- Keeping track of any connected expenses may be eligible to claim business deductions if one is categorised as a trader.
- Remembering to account for brokerage costs and capital losses as well as gains when computing tax.
- Losses – even losses from prior years – can be used to offset profits.
If calculating, applying, and adhering to tax norms and regulations seems daunting, one can always hire an experienced tax attorney specialising in bitcoin. This is the single best approach to minimise paying tax on cryptocurrency. If one generated significant capital gains over the previous fiscal year, an accountant is likely to be worthwhile.
Alternatively, one can also use online platforms and exchanges that provide a variety of built-in capabilities that make submitting a tax report much easier.
