Australian Taxation Office Overview

The Australian Taxation Office has different rules in regards to how people dealing in cryptocurrencies are taxed.

The Australian Taxation Office has different rules in regards to how people dealing in cryptocurrencies are taxed.

There’s a saying that many cryptocurrency investors may have already heard: “Don’t let the tax tail wag the investment dog”. In other words, the best advice for your cryptocurrency portfolio is to base your decisions on investment merit, not on trying to save tax.

Even so, there are taxation consequences for everyone with a crypto investment portfolio, so when a ‘grass is greener’ tax option seems possible, it can be very tempting to chase after it.

Where a cryptocurrency “trader” has an advantage is that they are afforded the ability to deduct any crypto losses from other assessable income — an immediate benefit not available to the passive cryptocurrency “investor”.

In times of better financial fortune, both “trader” and “investor” will enjoy investment appreciation on the value of the currencies. But in a cooling crypto climate the passive investor may find that selling currencies results in a capital loss. This can only be offset against a capital gain, not against income, although if there is no capital gain in the current income year, the loss can be carried forward and used later.

How inviting then the tax rules pertaining to currency “traders” must seem opposed to currency “investors”, who can deduct losses from other income. The trouble is, the tax treatment in these circumstances is one of those either/or situations. An investor who attempts to access better tax treatment when the crypto climate cools down by claiming status as a currency trader (without any discernible change in their pattern of buying and selling cryptos) will raise a big red flag with the ATO.

What the ATO looks for

The ATO’s definition of a crypto trader is someone who undertakes ‘business activities for the purpose of earning income from buying and selling cryptocurrencies’. Relevant issues in determining the tax status of a taxpayer include the use or not of trading systems, the volume of transactions, the existence of a business plan, a profit motive, and records being kept in a ‘business-like manner’.

The ATO advises that it will keep an active eye on people who ‘re-characterise’ their activities from being a crypto investor to a crypto trader. Typically, it says, the people with that red flag hanging over their names will have claimed a CGT discount in previous returns but, now realising losses, want to be able to claim an immediate deduction on revenue account.

This is not to say that such a thing is impossible, provided that a bona fide business of crypto trading is being conducted. Many passive crypto investors may have indeed found financial success from their forays into the market and begin to conduct a trading business alongside other activities. But the ATO warns that it is carefully scrutinising these sort of claims to make sure they are a genuine business activity.

Whether or not a taxpayer is carrying on a business of trading will always be determined on the basis of individual facts and circumstances, however important factors will typically include:
  • the volume and repetition of transactions
  • the professionalism the taxpayer displays in carrying out the activities (planning, strategies, record keeping etc)
  • the application of significant capital to the activity, and
  • a discernible profit intent.
An important consideration for the Tax Office is the ‘intention’ of the investor (that is, to hold the crypto for long-term capital growth and then sell to realise that growth) and the intention of the trader (that is, to buy and sell the crypto purely for short-term profits), and how these intentions can be evidenced down the track when it comes time to sell. This evidence of intention may include the factors mentioned above.

Implications of your tax status

The tax treatment of transactions entered into by investors and traders is quite different and is discussed further in the following pages.