The federal governments across the globe and the financial world are almost exploding. But on the other hand, cryptocurrency has been giving sleepless nights to global financial governance. Governments struggle to form the regulations and taxation norms for crypto assets from the US to China, Germany to India to the UK and Australia.
For individuals holding cryptocurrency in any part of the world, it is inevitable to comprehend the measures the government is taking in a cohesive manner to control this alternative form of currency. Against this backdrop, it is imperative to understand how to calculate the tax on cryptocurrency and a few misconceptions around crypto assets.
What are crypto Assets?
As the Australian Tax Office explains, crypto assets are a digital representation of value that you can transfer, store, or trade electronically. The phenomena also include non-fungible tokens (NFTs).
Crypto assets are in the form of digital assets. They are managed through cryptography, which protects digital data. In addition, distributed ledger technology is often used to track cryptocurrency transactions. These crypto assets can either have their blockchain platform or be traded on a private blockchain platform.
The problem begins with the fact that these blockchain platforms aren’t associated with any government agency or arent regulated so far. Hence Crypto assets function independently of any government interference. However, now crypto transactions – trading, buying, selling and holding – fall under the same taxation regime as other assets.
Tax Liability on Crypto Assets
You will attract taxes if you hold, transact, or exchange crypto assets; how you trade your crypto assets will determine the level of taxes on your holding and transactions. The most common usage of crypto is pretty similar to the stocks or shares of the company. You invest money in crypto assets like shares to make profits later.
Since one can hold on to his crypto assets over the years, crypto assets or cryptocurrency transactions fall under the category of capital gain tax. But, on the other hand, if one invests their self-managed super funds in crypto assets, it falls under the purview of regular income and attracts a levy.
However, crypto assets do not invite capital gain tax under a few conditions. If cryptos aren’t kept for investment purposes but the personal use, capital gain tax is not applicable on such crypto assets.
Common Crypto Assets:
There is no shortage of crypto assets in today’s financial world. They keep changing. They are tokens and coins in digital format. You may use a single digital wallet to manage different types of crypto assets.
Bitcoin is a cryptocurrency.
USDC is a stablecoin
DAI is an investment token
GALA is a game token
BAYC is a non-fungible token
When to apply capital gain tax?
- If you possess crypto assets, you will invite capital gain tax.
- When you will trade crypto assets – buy or sell – you will invite capital gain tax
- If you exchange one crypto asset with another – you will invite capital gain tax
There is a possibility that you may incur losses. However, you can not offset your crypto losses against your regular income. Instead, you can only deduct your crypto losses from capital gains in the same assessment year.
Simultaneously, you may have to pay less capital gain tax on crypto assets if you hold on to them for over a year.
You may be able to reduce capital gains using the CGT discount if you hold your crypto asset for at least 12 months.
Tax on cryptocurrency – How does it work?
When you regularly or periodically transact into crypto assets, each transaction either gains or losses. Subtracting losses out of gains brings you a net capital gain. This capital gain is your taxable capital income.
This capital income becomes a part of your regular assessable capital income for the assessment year. The amount of tax is usually based on the marginal tax rate applicable to that particular year.
As mentioned before, if you are an individual or a trust, you are eligible for a 50% capital gain tax discount if you have held crypto assets for over 12 months.
Real-world example:
- Let’s, for example, assume that you bought $8,000 of cryptocurrency and held on to them for the next 13 months.
- After 13 months, you sold the same amount of cryptocurrency for $19000.
- This means you made a capital gain of $11,000.
- Since you are entitled to the 50% capital gain tax discount for holding capital assets for over 12 months, your net capital gain income is $5,500.
- This $5,500 will be added to your annual income for that particular assessment year—for example, $82,000.
- Now, you will be paying the tax of $28,437.5 at a 32.5% rate of $87,500.
Crypto as a personal asset:
When you purchase crypto assets for personal use, like buying consumer goods or consumer products, it does not fall under the purview of capital gain tax. Therefore, you don’t need to pay capital gain tax on such crypto assets.
However, primarily, the crypto asset for personal use can’t be more than $10000. Therefore, the tax authority won’t disregard any asset that is more than $10,000.
Simultaneously, you can disregard all the capital losses from calculating your capital gain tax for a particular income year. You can not carry forward your losses to the following year, however.
Crypto Asset Accounting:
The Australian tax office wants you to keep records of all your crypto assets and transactions for a particular year.
To fulfil your obligation of determining capital gain tax, you must maintain the record of the following:
- Receipts of crypto asset purchases
- Record of legal cost & accounting cost
- Record of digital wallet and keys
- Record of software of apps
- Record each transaction, swipe, and exchange
- Record of transaction date and value
- Record of platforms where transactions made
Can PND Accountants and Advisors help in managing accounts of Crypto Assets?
We tried to explain every aspect of crypto assets and capital gain tax-related cryptocurrency. However, it is difficult for an average taxpayer to understand and maintain the lead on Crypto assets-related tax liabilities.
Capital gain tax on Crypto assets is complex by far, and tax experts should manage your accounts to avoid breaching any regulations and penalties.
PND Accountants and Advisors are registered tax agents with expertise in managing cryptocurrency-related taxation issues. Therefore, we are happy to help.
Whether you are an individual or a business, PND possesses the know-how of capital gain tax on crypto assets and is more than willing to get you a capital gain tax discount. In addition, we’ll ensure your assets are secured, your accounts are clean, and your tax liabilities are fewer.
