Most people who buy and sell cryptocurrency fall under the official classification of an investor, even if they buy and sell often. This means your crypto is subject to Capital Gains Tax (CGT), which can result in hefty obligations. If you want to reduce your tax obligations, you’ll need to be able to classify yourself as a trader.
Of course, calling yourself a trader isn’t enough. The ATO is cracking down on investors who are attempting to minimize their cryptocurrency tax obligations by misclassifying themselves, whether accidentally or intentionally.
Here’s a look at how the ATO distinguishes between cryptocurrency investors and traders, along with the requirements you need to meet to prove you’re conducting cryptocurrency trading as a legitimate business activity.
What Is a Cryptocurrency Investor?
Most Australians that buy and sell cryptocurrency fall under the “investor” classification. These investors may buy and hold for the long-term or they may sell or swap cryptocurrency regularly. In any case, an investor is focused on long-term capital growth. While most cryptocurrency holders in Australia are classified as investors, this is less than ideal.
As an investor, you will be subject to capital gains tax (CGT) rules, which means you’ll have to pay taxes on any gains you make when you sell your cryptocurrency. For instance, if you buy $500 in crypto and sell it for $700 later in the year, you may owe capital gains tax on the $200 profit. You might be able to deduct transaction fees from the profit, but the proceeds will be taxable.
Some investors may qualify for a 50 per cent discount on CGT if they hold crypto for at least 12 months before selling it and it is wholly owned by a trust or individual. Crypto held by a superfund may qualify for up to a 33 per cent discount within the same timeframe. So, how much does CGT cost?
Instead of taking a percentage of your profits, you will instead add the profits to your income. As such, you may pay as much as 45 per cent on your crypto gains if you are in the top marginal tax bracket. This system makes cryptocurrency less attractive for high-income earners, especially those handling it in volume, which is why it’s important to understand if you meet the requirements to be considered a trader.
What Is a Cryptocurrency Trader?
There’s a long list of requirements you must meet to be considered a cryptocurrency trader for tax purposes. Starting with the definition, a cryptocurrency trader is someone who buys and sells crypto for short-term profits (compared to the long-term capital growth goal of an investor).
Additionally, a trader works with a detailed strategy that determines when they will purchase cryptocurrency and when they will sell that cryptocurrency. Traders also work in high volume, meaning they trade large amounts often and they keep a record of all of their gains/losses and transactions over time.
The Australian Tax Office will only designate you as a trader if you prove that you are “carrying on business” and not just an individual looking to turn a quick profit with your crypto transactions. This does not require substantial capital, a registered business, paid research or hired staff, although any of these elements can help you solidify your classification as a trader over an investor.
If you do meet the requirements to be classified as a cryptocurrency trader, you will not be subject to the CGT rules. Instead, the rules of trading stock will apply. While this can save you money, it’s advisable that you understand the implications.
How Cryptocurrency Traders Are Taxed
While cryptocurrency traders are not subject to CGT rules, they must understand the implications of the trading stock rules. In short, these rules mean:
- Cryptocurrency traders have all profits taxed like any other income.
- Crypto assets held at the end of the year that have shown an increase in value will realise income for tax purposes.
- Crypto assets held at the end of the year that have shown a decrease in value will realise deductions for tax purposes.
The primary advantages of being classified as a trader are that you can take deductions on your crypto losses, you can claim related expenses for conducting your business (i.e., a percentage of your rent or mortgage) and you can use the instant write-off for relevant assets (e.g., hardware and software).
Additionally, crypto traders may choose to do business as a company, which means your crypto traders would be taxed at the company tax rates (either 25 per cent or 30 per cent) instead of your personal tax rate, which could save you a substantial amount of money. With that said, the trading stock rules that apply to cryptocurrency traders are far more complex than we can cover here.
Are You a Trader or an Investor?
If you currently buy and sell cryptocurrency and you’re wondering what your tax classification is and whether or not you qualify to be taxed as a trader, don’t make any guesses. Reach out to nexZen Accounting for help navigating this complicated topic and we’ll help you devise a strategy that will keep more dollars in your pocket come tax season.
Ready to take the next step? Schedule a consultation today and let our knowledgeable tax professionals answer your questions.