Investing in cryptocurrencies has evolved from an activity reserved only for tech-savvy crypto enthusiasts to a financial habit of millions of people worldwide, no matter if they are professionals from the financial industry or just beginner crypto traders that are discovering digital currencies. The enormous popularity of cryptos such as Bitcoin (BTC), Ethereum (ETH), and numerous altcoins has led to the growth of the crypto market, which is worth more than 2 trillion USD according to Coinmarketcap.
The crypto market provides huge opportunities for investors to profit from buying, selling, and exchanging cryptocurrencies, and just like any other profitable activity, this too is subject to taxation by government financial institutions. During the first years of cryptocurrencies, back when BTC was launched in 2009 and in the early 2010s, cryptocurrencies weren’t regulated much by governments, but since then, the situation has changed drastically.
If you’re a crypto investor and occasionally exchange digital currencies on crypto exchanges, or if you’re an experienced crypto broker, you definitely shouldn’t forget about cryptocurrency taxes.
In this guide, we’ll take a detailed look at what crypto taxes are, how they work, what are taxable and non-taxable events, and how to fulfill your tax return obligations regarding cryptocurrency.
Bitcoin and Other Cryptocurrency Taxes
When you’re trading company stocks and making a profit from them, you can’t just sell some stocks for a higher price than what you bought them for and leave it at that. You need to keep records of your purchase and sale of stocks and then annually file income taxes on your profit from trading stocks. This is because stock exchanges are fully regulated by government financial institutions and tax agencies.
Buying and trading cryptocurrencies is nowadays regulated pretty much the same way in numerous regions of the world such as the USA, European Union, or Australia. Even though cryptocurrencies aren’t accepted by most banks and countries don’t recognize them yet as legit currencies, they do recognize them as a financial asset which can lead to major economic gains and losses. This is why cryptocurrencies such as BTC and all other altcoins fall under tax rules.
However, understanding which cryptocurrency-related activities are taxable and which aren’t is a bit complex, especially for individuals that don’t have experience with filing taxes for capital gains. People usually pay their taxes along with their various utility bills and are automatically taxed by authorities for their properties such as vehicles and real estate, because these properties are officially registered with state authorities.
With cryptocurrencies, you don’t get tax bills from your local tax agency automatically. Instead, you need to personally file taxes based on your annual crypto activities. This can get quite complicated when you need to calculate your crypto taxes on your own, but luckily there are crypto tax experts, taxation software, and forms that will help you file your taxes in a precise manner.
You just need to be aware of all of your crypto trades during the year and file them accordingly.
Should You Pay Crypto Taxes?
Let’s answer this question right away. Yes, you should definitely pay your crypto taxes every year. It may feel unjust that you’re paying taxes on digital trading events that don’t use any government infrastructure like fiat currency or financial institutions, but keep in mind that you’ll avoid a lot of unnecessary stress if you pay those taxes.
The best thing you can do is research on how to pay as low crypto taxes as possible and this is where consulting an accountant or lawyer that specializes in crypto taxes might be the best solution to find out how to comply with local tax laws without paying more than you have to.
Tax Evasion and Legal Consequences
Tax evasion is something you really don’t want to get mixed up in. Governments around the world operate their institutions and infrastructure from taxpayers’ money and tax evasion is considered a serious criminal offense everywhere in the world.
If you’re caught evading taxes, depending on which country you live in, you might either get a serious fine, a prison sentence – or both. Getting caught evading taxes by authorities will cause you some huge, unnecessary stress and it’s simply much easier to comply with local tax laws and pay the required share of your profits.
The IRS and Cryptocurrency Taxation
The American Internal Revenue Service (IRS) is known as one of the most robust tax agencies in the world so it’s no surprise that it was among the first such agencies to start regulating cryptocurrency taxes. The IRS regards cryptos as any other property and therefore maintains a taxation policy on virtual currencies that define any capital gains that originate from cryptos as taxable.
Given the fact that cryptocurrencies aren’t recognized by US laws as a legitimate currency such as US dollars, the IRS treats cryptos as a property whose value can be converted to dollars and deducts this value from the average price of cryptocurrencies at the moment when you purchased or sold them.
This policy of crypto value estimation and treating cryptocurrencies as property has been taken over by many tax authorities worldwide. You should note that the IRS and similar tax agencies use artificial intelligence and data analytics software in order to track blockchain transactions for monitoring potential tax evaders and to be able to realistically estimate crypto taxes.
Non Taxable Cryptocurrency Events
Not all cryptocurrency-related activities are taxable events. There are three main categories of non-taxable events that carry no tax implications whatsoever.
Buying Cryptos With Fiat Money
Numerous popular cryptocurrency exchange platforms such as Coinbase, Binance, Kraken, and others allow users to conveniently purchase cryptocurrencies directly with fiat money through the platform. Users just use their bank accounts to facilitate a wire transfer of cash to the platform, or they fund their account with a debit card or credit card.
Buying cryptocurrency like this isn’t a taxable event. It’s simply regarded as a purchase of goods by an individual and as long as you just make a purchase and hold onto your coins, you won’t be taxed. People who buy cryptocurrencies and keep them as a store of value for at least 12 months are considered long-term investors by both US and Australian tax regulations. While holding crypto coins and tokens, you won’t have to pay any taxes, unless you decide to sell those cryptos for fiat money or to exchange them for another cryptocurrency.
Personal Use Asset Rule
Crypto assets that fall under the personal use asset rule are an exception from taxation. This rule can vary depending on the country, so it’s best to get fully acquainted with what is considered a personal use asset in your country.
For instance, in the US, the IRS considers all assets that are not used for gaining profit, business, and increasing wealth, such as personal clothing, jewelry, your personal computer, television set, or home appliances personal use assets. If you only use small amounts of crypto coins to purchase goods and pay services that are for personal use, then your cryptos might not get taxed if you can provide the receipts and bills that prove so.
In Australia, cryptocurrencies up to the amount of 10,000 AUD are exempt from capital gains taxes (CGT) if you provide records that show you have only been using those coins for personal purchases. If you bought let’s say 20 pairs of similar shoes in a single batch, then the tax authorities would really have a hard time believing that those shoes were for personal use and not for further sale.
If you send someone a certain amount of cryptos as a gift, without any exchange of assets taking place, you won’t be taxed. Of course, if gifting cryptos becomes a frequent activity for a pair of individuals, this might attract tax authority attention, because it would be apparent that the individuals that are frequently sending each other crypto gifts are actually trying to evade taxes this way and that they are actually trading assets.
Cryptocurrency Capital Gains Tax Events
When it comes to crypto taxes, capital gains tax events are what constitutes the final amount of taxes you need to file annually on your assessable income.
Cryptocurrency transactions are what forms the bulk of taxable crypto events since transfers are basically the most common operation among crypto traders.
- Selling Cryptos / Cashing Out
Every sale of cryptocurrencies for fiat money is considered a CGT event. Cashing out cryptos into fiat money is how people convert their digital currency into real-world money they can transfer to their bank account and spend at stores. Each time you convert a certain amount of your crypto coins into fiat, you are generating a taxable event and it’s important to take note of each of these conversions for tax filing purposes.
- Exchanging Cryptos For a Profit
One of the main reasons people invest money in cryptocurrencies is to profit from exchanging their coins for other cryptos at the right time when an exchange can earn them more money than they initially invested. These short-term gains are one of the most common for-profit transactions among crypto traders. This is a CGT event and all profits from exchanging cryptos are taxable. You can’t claim that profits from exchanging cryptos are personal use assets, because it is clear that when you exchange coins and make money from it, that it was intentionally done to profit from the transaction. The cost basis for calculating your taxes on crypto exchange profits is calculated using the market value of the cryptocurrency you traded, at the time you bought it and the moment you sold the coins.
- Paying for Products and Services With Cryptos
If you pay for goods and services with cryptocurrencies, you won’t be taxed if you provide documentation that shows you are under the personal use asset limit in your country and that you only made purchases intended for personal use. However, if you pay for goods and services in huge volumes, be prepared to get taxed on those purchases. You should consult a tax professional to see how you can differentiate personal use assets and taxable purchases. For instance, if you have bought a considerable amount of similar products for your online retail business, that will surely be taxed, but if you ordered a few different products for your household, you should provide documentation and explanations that will help exempt those products from taxation because they are for your personal use.
In case you’re engaged in cryptocurrency mining operations, your local tax authorities might consider that as a business endeavour and treat income from crypto mining as a CGT event. If your local tax agency does consider your mining operation as a taxable business, you’ll probably be taxed on all the income from mining. However, you can get all the expenses you incurred during mining deducted from the taxed amount of cryptos if you provide the receipts for the invested mining equipment, technical maintenance, and spent electricity.
Gains From Crypto Chain Splits
Cryptocurrency chain splits are a taxable event that crypto enthusiasts usually aren’t sure exactly how they are taxed. A chain split occurs when a hard fork happens and a single cryptocurrency is split into two currencies, such as the case of Bitcoin and Bitcoin Cash (BCH) or Ethereum (ETH) and Ethereum Classic (ETC).
Users commonly get the same amount of the new cryptocurrency as the amount of coins they held in the original blockchain. Bitcoin Cash users, for instance, are granted the identical amount of BCH coins as the amount of BTC they held in their wallet.
Crypto airdrops are events when cryptocurrencies are distributed for free by developer teams in order to motivate people to use their coins on the market. This is a common practice for new cryptocurrencies. Airdrops are usually of quite low value, but they are considered as ordinary income which means they can be subject to taxation, so it’s best to keep records of your crypto airdrop gains in case you have to include them in your tax report.
Crypto Taxes in Australia
In Australia, the Australian Tax Office (ATO) is responsible for taxing cryptocurrencies. The popularity of cryptocurrencies is rapidly increasing in most regions of the world, so it’s no surprise that the Australian tax authorities are also taking a more active approach towards taxing crypto gains.
These are some of the key factors you should take into account when it comes to crypto taxes in Australia.
ATO Cryptocurrency Policy
The ATO takes a similar stance regarding crypto taxation as the IRS. Cryptos are regarded as capital assets and all CGT events related to cryptocurrencies must be filled annually in your tax report. This includes all types of crypto transactions you’ve profited from and it also includes all sorts of purchases that can’t be considered personal use assets. Crypto mining, profiting from airdrops, and cashing out your digital currencies into fiat money are all considered taxable events.
It’s highly advisable to keep detailed records of all of your transactions, exchanges, cashouts, and airdrop profits in order to file your taxes accurately without missing out anything, because in case you fail to include a taxable event in your tax reports and the ATO notices it, you will be processed for tax evasion.
Difference Between Investors and Traders by Australian Law
Australian tax law makes a difference between crypto investors and traders. Even though most crypto enthusiasts would classify themselves as traders if they are accustomed to buying, selling, and exchanging cryptos on crypto exchange platforms on a daily basis, the ATO classifies most of them as investors.
This is because the ATO considers all individuals that invest money in cryptocurrencies and profit from selling their coins after they have gained higher market value as long-term investors that profit from capital gains.
Traders, on the other hand, are sole traders and companies whose businesses include crypto transactions. For instance, if you’re an online shop owner that accepts cryptocurrencies, your business falls under the crypto trader classification.
The Australian tax authority will determine if you’re a crypto investor or crypto trader based on your annual income from crypto-related activities, thanks to records of your transactions, their repetition, and trading volumes. Important decision-making factors for the ATO also include if you have a clear intent of profiting, the amount of invested capital, and the degree of professionalism with which you engage in crypto trading or investing.
If you’re unsure whether you’re considered a crypto investor or trader under Australian law, it’s best to reach out to the ATO contact service.
Capital Gains and Capital Losses
Capital gains from cryptos are all subject to taxes, but in case you have sustained capital losses, such as cashing out your cryptos into fiat money at a lower price than the one you’ve bought them for, you can use those capital losses to lower your capital gains taxes.
This means if you’ve bought an asset for 500 Australian dollars and sold it for 300 AUD, you’ve sustained 200 AUD capital losses. In case you have earned 500 AUD of capital gains from another crypto, those gains will be lowered by 200 AUD of capital losses you have sustained from the other trade.
You should always keep records of your capital losses since they will help you in lowering your capital gains taxes. Also, you might be eligible for a CGT discount if you meet certain requirements.
Filing Crypto Taxes in Australia
The ATO has its MyTax platform where users can easily file their taxes, however, you should consult a tax professional just to be sure you know how to file your crypto taxes accurately and check if you’ve included all events that are subject to tax treatment in your report.
Reporting Crypto Taxes
After listing all the main taxable and nontaxable events regarding cryptocurrencies, let’s take a look at some of the key factors you should keep in mind when filing taxes.
Keep Crypto Transaction Records
Whatever you do, you simply must keep records of all of your crypto transactions for tax purposes. Purchases, sales, exchanges, and all other transfers must be taken into account when calculating your taxes. You should also keep records of when your transactions take place because the date and time of the transaction determine whether it falls into your current tax year.
If you don’t have the documentation needed to prove a certain amount of cryptos were only used as your personal use assets, you’ll probably have to pay capital gains taxes even though you could have legally avoided it. This is why you should keep all records and calculate your taxes according to local tax regulations.
Filing Crypto Reports According to Local Regulations
Tax laws can be drastically different depending on the country you’re residing in, so you should get fully acquainted with your local regulations and tax rates before filing taxes. Also, it’s a good idea to study the local tax policy before you engage in activities that fall under CGT events in your country.
This way you’ll avoid any unpleasant situations such as gaining considerable profits from crypto trading, spending the profits, and then not having money to pay your taxes. In such situations, you might have to take a loan to pay your taxes, which will further complicate your financial situation. Unpleasant scenarios like these can be fully avoided if you’re aware of the local crypto tax policy and accordingly plan your investments. Just don’t try to avoid paying taxes because that will land you in even more trouble.
Crypto Taxation Software
Fortunately, there are various software platforms that offer top-quality crypto tax calculation services based on your transaction history. What you need to do is include all the information the tax software requires in order to have the full picture of your taxable events, capital gains, and losses.
Cryptotaxcalculator.io and Koinly.io are great platforms for accurately calculating crypto taxes. Crypto Tax Calculator supports 21 tax jurisdictions for tax calculations, while Koinly is a great solution for filing crypto taxes in Australia because it’s specialized in the ATO tax policy.
These platforms can save you hours and days of stressful manual tax calculations by connecting your crypto wallet addresses and exchange platform accounts and automatically calculating your taxes from the transaction history. Apart from calculating your taxes, these platforms can also automatically fill out your tax forms and support numerous tax documents.
Consulting Crypto Taxation Professionals
Filing crypto taxes by yourself manually is only advised if you have extensive experience in reporting your crypto taxes. It’s not a good idea to try and file your crypto taxes manually if it’s your first time. Using a crypto tax calculator platform is great, but you might also want to consult a tax professional that deals with cryptocurrencies.
An accountant or lawyer that specializes in cryptos might save you a lot of time you would otherwise spend on researching the local tax regulations. Tax professionals charge their services, but it’s totally worth the fee to consult a professional who might give you some valuable insights regarding the local tax regulations and your obligations as a crypto taxpayer.
Once you get to know all the key aspects of local crypto tax regulations, you’ll have more confidence in filing your taxes, no matter if you use a crypto tax platform or if you’re filing the taxes manually.
Filing Taxes on Time
Whichever method of reporting taxes you choose, it’s important that you file the taxes on time. Failing to file the taxes in the designated period, prescribed by your local tax agency will surely result in severe tax consequences and unpleasant surprises such as additional fines for not reporting taxes on time.
Paying your capital gains taxes is something you do once a year, it isn’t something that you do every month, so it’s important to do it on time. In order to always stay on time with your tax obligations and avoid stressful periods of gathering your crypto record before the tax filing deadline, you should definitely use the advanced technology of tax filing software.
A Few Final Words…
Reporting your crypto taxes is definitely one of the least exciting cryptocurrency-related activities. Of course, you want to spend your time investing in coins, exchanging them, and making a profit, but unfortunately, you have to take the time to file your crypto taxes regularly every year to fulfill your obligations with local tax authorities. This guide has answered some of the most common questions about crypto taxes, taxable events, and all the key factors you should keep on your mind when it comes to taxes.