Let’s talk about crypto tax!

Let’s talk about crypto tax – one of the hottest topics for investors right now. If you’re nervous about how much tax you’ll owe, or simply unsure where to look, this is the email for you! I’ll share some general insights and concepts about crypto tax in Australia to help you navigate this area. I’m not an Accountant and this is not financial advice – always chat with a professional about your specific situation – these are simply some approaches to consider as you navigate your crypto journey.

Ready? Let’s dive in.

How does Capital Gains Tax (CGT) work?

Contrary to popular belief, crypto gains are not considered gambling wins, your gains are considered an asset. This means it will be taxed like other capital assets, such as shares or property. The CGT is what you pay on any profit you have made on your investments, and it gets triggered when you “dispose” of the asset.

Disposal can occur in a number of ways:

• Selling crypto for fiat currency (e.g. swapping Bitcoin or altcoins back to AUD).
• Swapping one cryptocurrency for another (e.g. swapping Bitcoin for another altcoin or stablecoin.)
• Gifting crypto (this is treated as though you sold it at its current market value on the date of the gift)
• Using crypto to purchase goods or services (any gain or loss must be reported).

Note that you need to keep track of your crypto transactions for the ATO. (In most cases they have access to the exchange data!)

How is CGT calculated?

The tax is calculated on your profit, meaning the difference between what you paid (the cost base) and what it’s worth when you sell. For example, if you bought Bitcoin for $30,000 and sold it for $60,000, your capital gain is $30,000. Which is subject to CGT.

However!

If you’ve held that Bitcoin for over 12 months, you could be eligible for a 50% CGT discount, potentially cutting your taxable gain from $30,000 down to $15,000.

This is one of the simplest ways to reduce your tax liability and another reason why buying low in the bear market and holding until the bull market is a great strategy. Not only are you working with market cycles for maximum profit, it could potentially halve the amount of CGT you need to pay.

What happens if you don’t make a profit?

If you sell at a loss (e.g, bought at $30,000 and sold at $20,000), you don’t pay CGT. Instead, you can use that loss to offset future gains. But here’s the catch: you have to sell to lock in the loss. Holding a coin while its value drops to the floor doesn’t count. And if you swap one crypto for another, like Bitcoin to coin ABC, and coin ABC plummets, you’ll need to sell coin ABC to crystallise that loss for tax purposes.

So if you’re looking to lock in a loss to reduce tax, you will need to exit your position while it is at a loss.

Does CGT apply to staking?
Staking crypto can be a great way to earn passive income, but yes, it does come with tax obligations. When you stake your crypto and earn rewards, those rewards are treated as taxable income at the time they become available to you.

For example, if you earn $1,000 worth of rewards in a week, you’ll need to report and pay tax on that $1,000, even if you don’t sell or convert it. The tricky part is that if the value of that staked crypto drops later (due to market fluctuations), you’ll still owe tax based on its value when you received it. This means you could face a tax bill for income that’s no longer worth the same amount.

Pro tip? Potentially take a more defensive approach.

One way to do this is to convert those rewards into a stablecoin, like USDC, to lock in their value and avoid market fluctuations. If the market falls, and you hold onto speculative coins, you could end up with a loss. However, to claim that loss for tax purposes, you’d need to sell the asset and crystallize the loss. Converting gains to stablecoins like USDC is a smart intermediary step because it locks in your profits, keeps them in the crypto ecosystem, and prevents unnecessary exposure to market swings. (And no, you won’t get taxed twice when you eventually transfer those stablecoins to your bank account).

What about different tax structures

Another way to reduce your capital gains tax is to consider using a different tax structure. This requires a bit more planning to set up, but the benefits could be significant.

For instance, you might consider structures like trusts or self-managed superannuation funds.

These structures do come with additional compliance requirements, so they’re better suited for those investing significant amounts or planning for long-term wealth building. But it’s something to keep in mind if that’s where you want to head.

Which brings me to my last and possibly most important point.

Always go for the big profit! 

In my opinion, we should never let capital gains tax keep us from creating wealth. We are in this game for ultimate financial freedom, and many of us are here to create wealth that can be handed down for generations. If we’re worried about how much tax we need to pay, we are doing ourselves a disservice when it comes to this asset class.

Yes, we need to consider tax, but when we’re in a bull market, and we’re looking at one of the biggest wealth opportunities of our lifetime, tax should be at the back of our minds, not the forefront. Whether you pay 25c or 50c to the dollar in tax, you still have profit that you wouldn’t have had otherwise.

At the end of the day, we’re not here to scrape by – we’re here to build a financial legacy, and crypto is one of the best opportunities I’ve seen that is available to us.

Crypto is the opportunity and it’s there for the taking. I would hate for anyone to miss out because of tax anxiety. Yes, it needs to be factored in and accommodated for, but it should never stop you from pursuing the life you want and creating the wealth you deserve.

 

For more about CGT tax obligations in Australia, check out the ATO website:
https://www.ato.gov.au/individuals-and-families/investments-and-assets/crypto-asset-investments