This is a series of guides for crypto newbies, with a focus on investing in Australia, although a lot of the advice will be suitable for a global audience. This is a guide from the point of view of people new to the space, without in depth knowledge of blockchain, defi etc.. and so will seem very basic to seasoned crypto investors but there seems to be little simple information available to those just starting out.
Part 6 : Tax
Let me start by saying I am not an accountant, this is my own research from the ATO website and my understanding on how they will apply the rules they set, so use this as a starting point to do your own research, and preferably engage an accountant with experience in dealing with crypto, and most importantly keep records! The following info will hopefully help you understand what records you need to keep. It's no secret the ATO will be taking an increasingly close look at those investing in crypto and it is likely being a crypto investor will increase the likelihood of an audit. The ATO doesn't mess around, so whether you agree with the rules or not you need to keep spotless records and ensure you are paying what the rules say you should.
What records should you keep? When you purchase, you need a record of the date, the total AUD value, any fees, the number of coins/tokens purchased and the price paid for the coin/token. This is your cost basis for the asset. In Australia, crypto is treated as an asset, like a stock, therefore any change in value is subject to capital gains tax when a taxable event occurs.
What is a taxable event? When you dispose of an asset is is a taxable event, for crypto this is when you sell, or when you transfer to another person or to a different asset. So if you sell, you need a record of the date, the AUD value of the sale, the number of coins/tokens sold and the price per coin/token, you then calculate your profit or loss and this is added to your capital gains for the year (positive or negative). If you've held the asset for more than 12 months, and you've made money, then you record only 50% of the profit as a capital gain. If you transfer to another coin, i.e trade BTC for ETH, this is a taxable event, and you need to record it as if you had sold the BTC for AUD then immediately bought ETH, i.e you need to know the AUD value at the time of exchange, and then use this to calculate profit or loss from your original BTC purchase. It is NOT a taxable event if you transfer the same asset from one wallet you own to another wallet you own, however it is a taxable event if you transfer to someone else - whether sale or gift you need to calculate profit/loss on the market value of the asset even if you gave it for free.
What about airdrops? Airdrops are when you receive free crypto, it may be a promotion (see my previous blogs on airdrops), or for watching some videos (e.g Coinbase Earn), or when tipping or writing on sites like Publish0x. These are classed as income, and need to be recorded as date, value of airdrop at market value in AUD, and number of coins/value of coin. You will need to declare these as income, and this is your cost basis to then calculate CGT when you dispose of the asset, arguably some may have zero value when you receive them, i.e promotional airdrops of new coins not currently listed on market - some may say you need to declare the initial listing price, alternatively some will use a zero cost base and then pay CGT on the entire value when you sell, honestly I'm not sure which would be correct you'd need to get advice from an accountant experienced in the area if these make up a significant part of your crypto earnings/portfolio.
How do I treat staking/yield farming/liquidity mining rewards? This is where things get particularly confusing, or at least difficult to track if you aren't on the ball with your records from the start. Staking rewards are classed as income, so whenever you claim your rewards, you need to record all the details, and declare income on the AUD value of the asset at the time you claimed the reward. This is obviously problematic with assets as volatile as crypto as it may be worth double or half depending on when you claim, and you may be paying more income tax than you have asset if you time it badly, but obviously you want to claim often so you can compound your earnings. Some staking assets/wallets automatically compound/claim so you don't have a choice on when you claim and tracking these transactions can be tricky.
Yield farming and liquidity mining is a particular headache as you are swapping coins to provide liquidity pairs (LP) and each swap is potentially a CGT event. This is less of an issue if you buy the coin and immediately do your swaps and add to a pool, but if the value of the coin has changed from when you bought it to when you swap then you need to record the event, and obviously you need to record all gains as income.
Hopefully that all makes sense, I think the principals are simple, but become complex in practice as you explore the depths of defi, the simplest way is to just buy and hold (ideally on a cold wallet - not your keys, not your crypto - and remember if you are transferring the same coin from your account on an exchange to your personal wallet, it is not a taxable event), then you only pay tax when you sell. But if you want to increase your earnings by staking, or liquidity mining then you need to get your head around this, and the records you need to keep, ideally before you start. I should add also, hopefully you are only recording gains, but any losses for CGT offset any gains (but not income), and can be carried forwards to future years if there are not gains to offset.
There are websites that can help, and if you are with the main exchanges, e.g Binance, Coinbase, Digital Surge (coming soon to some of these sites below, not currently linked), the information can be shared via API on your transactions and holdings. They don't necessarily cope as well with some of the individual coin wallets (although Ledger Live seems to work well), and obviously the liquidity mining. I have signed up with a couple but not had chance to plug all my details in yet, so I don't recommend any one over any other at this stage, I trust my own spreadsheets and for now that is enough for me but I will be comparing the data generated by these sites to that I calculate manually when it comes to tax time.
Those sites are:
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This is not financial advice and I am not a financial advisor, nor am I an accountant. Do your own research before making any investments or tax decisions.
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