Australia Crypto Tax Guide 2024

Author: Electra Frost, Founder of Electrafi

Content

• Introduction
• Australia’s Uncertain Crypto Tax Landscape
• Tax Treatment of Cryptocurrencies in Australia
• Staking Rewards and Airdrops
• Transactions with Gift Cards or Debit Cards
• Prizes, Gambling Winnings, and Donations
• Loss or Theft of Crypto Assets
• Record Keeping
• Chain Splits
• DeFi and Wrapping Tokens
• Cost Basis Methods for Crypto Taxation
• Classifying Gas Fees
• Conclusion

Introduction

This guide is intended to provide a high-level overview of the key aspects of the Australian tax treatment of cryptocurrency and digital asset transactions, including capital gains tax (CGT) and direct income tax implications, indirect tax events, transaction types, and record-keeping requirements. It is for general informational purposes only and should not be taken as tax advice.

Australia’s Uncertain Crypto Tax Landscape

It’s essential to note that Australia has not issued specific tax legislation for cryptocurrencies and digital assets, leaving taxpayers to interpret existing tax laws designed for traditional assets and to follow public rulings, practical compliance guidelines, and guidance from the Australian Taxation Office (ATO) website.

Since the initial bitcoin public rulings in 2014, the ATO has periodically updated its guidance to address the complexities of the evolving crypto economy. However, this guidance is non-binding and subject to change without formal notification, placing the onus on taxpayers and practitioners to stay informed. It is advisable to take “screenshots” of the guidance as evidence of what was relied upon at a certain point in time. The absence of dedicated crypto tax laws and the reliance on updated guidance underscores the challenges faced by those dealing with cryptocurrency transactions in Australia.

Additionally, the Board of Taxation conducted a comprehensive review into the tax treatment of digital assets and transactions in Australia, initiated in December 2021 and involving extensive consultations with stakeholders across various sectors. The Board submitted its report to the government on February 23, 2024. However, the report has not yet been made publicly available, leaving tax advisers without updated guidance. 

The ongoing lack of publicly accessible recommendations and effective tax legislation continues to pose significant challenges for those applying Australia’s complex tax landscape to cryptocurrency and digital asset activities, influencing some Australian web3 startups to consider relocating offshore.

Tax Treatment of Cryptocurrencies in Australia

Crypto Assets Recognised as Property, Not Money

In Australia, crypto assets are recognised as property for tax purposes. This means that they are treated similarly to other investment assets, such as shares or real estate. When crypto assets are acquired, held, or disposed of, these transactions are, in most cases, subject to capital gains tax (CGT) rules. Each crypto asset is considered a separate CGT asset, and any gains or losses from their disposal must be reported in an Australian tax resident’s tax return.

However, when crypto assets are used in a business context, such as trading, mining, or providing services, they may be treated as ordinary income rather than capital gains. In these cases, the proceeds from selling or exchanging crypto assets are assessable as ordinary income, and the cost of acquiring them is a deductible expense

 The Australian Taxation Office (ATO) has clarified that crypto assets are not considered a form of money, but rather a digital representation of value that can be transferred, stored, or traded electronically.

Capital Gains Tax (CGT) Events

A Capital Gains Tax (CGT) event occurs when a crypto asset is disposed of. This includes a variety of transactions such as selling the crypto asset, gifting it to another party, trading or exchanging it for another crypto asset or token, converting it to fiat currency (such as Australian dollars), or using the crypto asset to purchase goods or services. When a CGT event occurs, it may result in either a capital gain or a capital loss. These gains or losses must be accurately calculated and reported in the tax return of the Australian tax resident. Capital losses can be used to offset capital gains in the same financial year, and if there are excess losses, they can be carried forward to offset capital gains in future financial years. 

Additionally, if the crypto asset has been held for at least 12 months before the CGT event, individuals may be eligible for a 50% CGT discount on the capital gain. However, capital losses cannot be offset against other types of income, such as salary or wages.

Valuing Crypto Assets

To determine a capital gain or loss, the value of crypto assets must be converted to Australian dollars (AUD) using the exchange rates from the Reserve Bank of Australia (RBA). This conversion is necessary at both the time of acquisition and disposal of the crypto assets. Accurate record-keeping is essential to track the value and details of each transaction, including the date of the transaction, the value in AUD at the time, the nature of the transaction, and the parties involved.

This meticulous documentation facilitates the accurate calculation of any tax assessable gains or losses, whether they are subject to Capital Gains Tax (CGT) or treated as ordinary income in a business context.

Crypto-to-Crypto Transactions

Exchanging one crypto asset for another is considered a disposal of the original asset and acquisition of a new one. The market value of the new asset at the time of the exchange determines the capital proceeds for the CGT event. If the new asset’s value cannot be determined, use the market value of the disposed asset.

Non-Fungible Tokens (NFTs)

Non- Fungible Tokens (NFTs) are treated similarly to other crypto assets for tax purposes, with the specific tax treatment depending on the circumstances and purpose of holding the NFT. NFTs can be taxed as Capital Gains Tax (CGT) assets, trading stock, or business income.

The tax treatment of NFTs depends on various factors, such as:

• Investment: If the NFT is held as a long-term investment, any gains or losses from its disposal are subject to CGT.
• Trading Stock: If the NFT is part of a business’s inventory, the proceeds from its sale are considered ordinary income.
• Business Use: If the NFT is received or used in relation to providing services or products, its value at the time of receipt is treated as business income.
• Personal Use: In rare cases, if the NFT is used for personal enjoyment, it may be considered a personal use asset and not subject to CGT

Additionally, specific Goods and Services Tax (GST) rules apply, particularly for electronic distribution platforms (EDPs) facilitating NFT sales for offshore sellers to Australian consumers.

Staking Rewards and Airdrops

Staking

Staking rewards in Australia are considered ordinary income at the time the tokens are received. The value of these additional tokens is considered “other income” for tax purposes. The cost base of the staking rewards is their market value at the time they are received. This applies to various consensus mechanisms, including proof of stake, proof of authority, and proxy staking.

Committing cryptocurrency to a staking smart contract does not trigger a CGT event. However, when new cryptocurrency is received at the end of the staking period, it is considered the acquisition of a new CGT asset, with a cost base equal to the market value of the original cryptocurrency at the time it was committed to the stake​.

Airdrops

Airdropped tokens are treated as ordinary income at their fair market value when received. For initial allocation airdrops, the cost base is zero if received for free or the amount paid if there was a cost. If the airdropped tokens are later sold, CGT event occurs, and the cost base is the market value of the tokens at the time of receipt.

Transactions with Gift Cards or Debit Cards

Using crypto assets to acquire gift cards or load debit cards triggers a CGT event. The capital proceeds are the market value of the gift card or the amount by which the card balance increases. If the card is denominated in crypto, any gains or losses must be calculated based on the AUD value at the time of each transaction.

Prizes, Gambling Winnings, and Donations

Prizes and Gambling Winnings

Crypto assets won as prizes or through gambling are generally not considered ordinary income, but CGT applies upon disposal. The cost base is the market value at the time of winning.

Gifts and Donations

Donating or gifting crypto assets is considered a Capital Gains Tax (CGT) event. The market value of the crypto assets at the time of donation determines the capital proceeds for the CGT event. To claim a tax deduction for the donation, the recipient must be a Deductible Gift Recipient (DGR). Generally, tax is not payable on capital gains when donating crypto assets to DGRs if the gift is made under a will, under the Cultural Gifts Program, or if the crypto assets are personal use assets. Receiving crypto assets as a gift has no immediate CGT implications, but any subsequent disposal of the gifted crypto assets will trigger a CGT event, requiring the calculation and reporting of any capital gain or loss.

Loss or Theft of Crypto Assets

A capital loss can be claimed if crypto assets are lost or stolen, provided there is sufficient evidence of ownership and the loss. Required documentation includes the date of acquisition, date of loss, digital wallet address, cost of acquisition, value at the time of loss, control of the wallet, possession of hardware, and exchange transactions. 

If the private key to the digital wallet is lost, making the crypto assets irretrievable, this qualifies as a loss. However, if the assets can be recovered, they are not considered lost. In cases where a crypto asset exchange or platform goes into administration, a capital loss can only be claimed once the administration process is finalised.

Record Keeping

Maintaining accurate records is crucial for compliance. Keep details of each crypto asset, including information on acquisition, disposal, transaction dates and values in AUD. 

Additionally, any associated costs, such as transaction fees, legal expenses, and agent fees, should be documented. Records must be kept for at least five years after the relevant CGT event. 

Additionally, if the records are used to support a tax assessment that is amended, they must be retained for the duration of the review period, which can extend beyond the initial five years.

Chain Splits

Chain splits result in the creation of new crypto assets. The value of new assets received from a chain split is not considered income at the time of receipt but is subject to CGT upon disposal. 

It is crucial to identify which resulting asset continues the original asset and which is the new asset, as this affects tax treatment. If none of the post-split assets retain the same rights or relationships as the original, a CGT event occurs for the original asset, and each new asset is assigned a cost base of zero from the date of the chain split.

DeFi and Wrapping Tokens

DeFi Transactions

When crypto assets are deposited into a liquidity pool, a CGT event occurs. The capital proceeds from the CGT event are equal to the market value of the property received in return, which may be another crypto asset or a right. A CGT event also occurs when withdrawing crypto assets from the liquidity pool, and the capital proceeds are equal to the market value of the crypto assets withdrawn.

The tax treatment of DeFi Lending and Borrowing arrangement depends on whether beneficial ow​nership changes, with many resulting in a CGT event. This is because beneficial ownership of the relevant crypto asset typically ends due to the arrangement, either through exchanging one crypto asset for another or exchanging a crypto asset for a right to receive an equivalent number of the same crypto asset in the future. The capital proceeds for the CGT event are equal to the market value of the property received in return for transferring the crypto asset​.

Periodic rewards in the form of crypto assets received from DeFi platforms must be reported as assessable income at their market value at the time of receipt. These rewards are taxed similarly to interest income.

Wrapped Tokens

Wrapping and unwrapping tokens through a smart contract are considered exchanges of one crypto asset for another, triggering a CGT event. The capital proceeds for the CGT event are equal to the market value of the wrapped token at the time of the exchange. The market value of the wrapped token at the time of the exchange determines the capital proceeds.

Cost Basis Methods for Crypto Taxation

The ATO provides specific guidelines for calculating the cost base of cryptocurrency transactions, for determining capital gains or losses. The primary methods recognised by the ATO include First-In, First-Out (FIFO) and Specific Identification However, the Last-In, First-Out (LIFO) and Weighted Average Cost (WAC) methods may also be acceptable. Consistency in the application of these methods and detailed record-keeping is mandatory to ensure compliance.

First-In, First-Out (FIFO)

FIFO assumes that the first assets acquired are the first to be disposed of. This method is straightforward and commonly used in accounting practices. For example, if a business acquires 1 Bitcoin in January, 2 in February, and sells 1 Bitcoin in March, the cost base for the sale would be the cost of the Bitcoin acquired in January. This method simplifies tracking but may not always be tax-efficient, especially in a volatile market where asset prices fluctuate significantly.

Specific Identification

The Specific Identification method allows businesses to select which specific assets are sold, provided they can accurately identify and track each unit’s acquisition details and costs. This method requires meticulous record-keeping as each unit’s purchase price, acquisition date, and any associated fees must be documented. For example, if a business has 1 Bitcoin bought at $10,000 and another bought at $15,000, and it sells 1 Bitcoin, it can choose which Bitcoin to sell based on its cost base. This flexibility can help in tax planning, allowing the selection of units with higher costs to minimise taxable gains. However, for financial reporting purposes, it may not be appropriate.

Last-In, First-Out (LIFO)

LIFO assumes that the last assets acquired are the first to be disposed of. This method is less common and not explicitly detailed by the ATO but is sometimes used by taxpayers. Using the earlier example, if a business acquires 1 Bitcoin in January and 2 in February, then sells 1 Bitcoin in March, the cost base for the sale would be the cost of one of the Bitcoins acquired in February. LIFO can be beneficial in periods of rising prices, as it matches higher cost assets against revenues, potentially reducing taxable income. However, it requires detailed justification and consistent application.

Weighted Average Cost (WAC)

The Weighted Average Cost (WAC) method can be applied in two ways: the per-transaction method and the entire-year-of-income method. The per-transaction method involves calculating the weighted average cost for each transaction, making it ideal for businesses with frequent trades. The entire-year-of-income method averages the costs over the entire year, which may be more suitable for businesses with stable holdings. For example, if a business buys Bitcoin at different prices throughout the year, WAC calculates the average cost of all units, providing a single cost basis for any sales made during that period. This can be an appropriate method for operational crypto and digital assets that are subject to trading stock rules.

Documenting the Choice

Businesses are advised to document their chosen cost basis method. This documentation does not need to be lodged with the ATO but should be retained as part of business records. The documentation should include the method elected, the date of the election, and the specific assets it applies to. For instance:

We, Crypto Business Pty Ltd, choose to use a weighted average basis for our crypto assets starting today:

Crypto Asset	Wallet Address	Exchange Platform
Bitcoin (BTC)	1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa	XYZ Exchange
Ethereum (ETH)	0x32Be343B94f860124dC4fEe278FDCBD38C102D88	ABC Exchange

Crypto Business Pty Ltd

19 January 2024

Such documentation can provide clarity and substantiation in the event of an audit.

Classifying Gas Fees

Gas fees are classified based on the purpose of the crypto asset. For assets held as long-term investments, gas fees should be included in the cost base for CGT purposes. For assets used in the ordinary course of business, gas fees are treated as deductible expenses. Detailed records of all transactions, including gas fees, acquisition dates, and amounts, are essential for accurate tax reporting.

Conclusion

The choice of cost basis method significantly impacts the calculation of taxable gains or losses. Businesses should choose the method that aligns with their financial strategy and compliance requirements, ensuring consistent application and thorough documentation. ElectraFi assists clients in navigating these complexities by providing tailored solutions and strategic configurations of subledger and tax software.

The tax treatment of crypto assets in Australia continues to evolve as the market matures, reach out to Electrafi at [email protected] to find out more!

Contact: [email protected]

Check out the full Global Crypto Tax Report 2024