Hi, just wanted to know if you send crypto from an exchange to a cold storage wallet then back to the exchange to sell how does the ato know if the crypto has been held to work out how much tax is paid?
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Hi @Lawman23
We'll know about your income/crypto transactions from you or sometimes third parties.
Ultimately, you'd report income from your investments in your tax return and you'd keep the records to back it up in case we need.
If you're after specific advice from us about how your crypto activities should be treated, we'll need more info from you to understand your situation. Get in touch with us for tailored technical assistance and in the meantime check out Crypto and your taxes.
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Sending it isn't a CGT-event only disposal is. Also the fees are paid for in the asset being sent, which is accounted for in that you don't have that asset anymore to ever dispose of, never triggering a CGT-event for what ever you've spent in fees. Lets say its on Ethereum, which sometimes can cost 30 usd for one transaction and that isn't even high haha.
The exchange reports you exist, you did kyc. The exchange has records of withdrawals and deposits if they ever needed to check, and which address you sent to. Also not to mention blockchain is an immutable ledger which can't be manipulated so where that crypto goes is tracked from start to finish.
Anyway you don't need to report your crypto for CGT purposes unless you actually dispose of it and if you hold it for a year CGT-rate is halved, which is a great incentive to pick solid plays you want to hold.
What i'm trying to point out though even if you didn't ask, costs of maintaining an asset (storage cost, fees etc) are deductible, but in the case where you're sending around the asset that is also used to pay 'gas' on the network, its already deducted as its not in your possession to ever be traded to realize a gain on it.
So you have 1 eth, you send it to your wallet then back to the exchange, it could have 5x in value but you don't pay CGT unless you trigger an event by disposal of the eth for usdt/btc/aud et cetera, realizing that gain. And the 0.02 ETH lets say you paid in gas back and forth is no longer in your possession, so when you buy btc with eth you'l only have 0.98 eth, and the 0.02 eth never triggers a tax event, so its deduced as an expense anyway.
Of course you could keep a record of gas paid in your spread sheet along with CGT-events like disposals, but for all intense and purposes the blockchain keeps that record for you.
If you put in your cold storage wallet into a block explorer lets say ethscan, not only will you find the gas you paid on depositing and withdrawing but you can track where the eth went before and after that to find any transactional info you need that's defi related. Events like trading on a centralized exchange aren't on chain they are just happening with fake numbers in the exchanges database/books. Centralized exchanges have all assets people deposit, the more curious question is, they can just say "oh bitcoin is half price this week" and if you get feared into selling they basically stole half your bitcoin, and if cex collude to decide the value of btc, they don't even really need trading volume to proof that, just remove all buy orders from the books and start again lower. Which is more concerning, how do you track their internal workings?
Where as using your 'cold storage wallet' as a hot wallet, connecting to dex to trade on chain via liquidity pools, nobody can move price without real trading volume of the real underlying assets. I think cex need to become a thing of the past, besides off-ramping to our bank, but wallets could provide this service in future. Anyway I think cex are what we should be worrying about in terms of asset manipulation and record keeping. Record keeping on blockchain is very easy as that's the whole technology, blockchain is an immutable ledger tracking the journey of every fraction of a fungible token from inception through time, for every transaction as transactions are the blocks in an unbroken decentraly verified, globally maintained chain. There isn't one server or point of attack if you want to modify the blockchain maliciously, a copy is stored on every fullnode, and people used to keep a copy of it running just to have a wallet on their pc... think about that... to use bitcoin you had every single persons transactional history on your computer, for the entire bitcoin blockchain, every single transaction that has ever existed for the whole earth.. just so you could interact with future blocks i.e send and receive. And to keep interacting with it, you'd be downloaded all the new blocks even if you yourself aren't sending and receiving.
So they might not be able to prove it today, but even after 6 years where tax records are traditionally going into the shredder, proof of what you did on chain is kept for the entire past/future of that blockchain. Hypothetically forever.
Actually i'm thinking to years back when I looked into the CGT method, I think you do log the value when withdrawing/depositing, but i'd love clarity too if that's just for records or its actually a CGT-event i.e. counted as a disposal just sending your crypto to yourself.
I found CGT maddening for crypto as a trader who likes messing around on many exchanges learning about my industry from every angle; which tends to be more costly vs holding and waiting, often the best play isn't trading, and also your time to just collate your activity is insane.. I mean you'll literally spend half a day just documenting the ten dollars you flipped 1000 times to make or lose 50 cents, when it only took you 10 minutes to do that. Lets say using bots or just how LPs work or order books... i.e when buying 10 dollars worth you might be taking 50 different small orders or getting a gradated price in an LP. CGT for how complex but simple crypto is melts my brain, I do hundreds of complex and varied things in a day that I barely need to fully understand and majority of people barely understand, and I might only make small gains that day or even a loss, scaping the chain for that data will take you 2000x longer than doing it, not even exaggerating. I gave up trading in 2019 just so I could collate all my trading data from every exchange i'd used and dex took a long time because I needed to use github tools which often failed so I wasn't confident i'd scraped every block for potential trades.
Doing a stocktake eofy is so much more elegant and more importantly faaar more accurate and true. CGT programs are highly inaccurate I found and its too easy to have gaps because of the immense data requirements, which throw out the most important thing you're reporting which is your actual gain/loss. I'd probably boil that down to the highly inconsistent reporting of platforms and the vast differences of those platforms, you need to be exceptionally methodical just to add all the information to one spreadsheet and fix all of the timezones, and rearrange all of the different formats, and that's with perfect data, which CEX aren't known for. DEX are harder but for completely different reasons, you'd spend more money than you're trading to afford the kind of programs/services you need to collate 25% of what you're doing in defi. Majority of it might involve money but from a perspective of a user that doesn't come into play most of the time which is hard to explain, but its an abstract process, you're working with concepts until you manage to get some money out of it, often indirectly, especially in game-fi, other areas too. And I often just want to forget about the business and focus on the ecosystem which takes an entirely different frame of mind to accounting.
Low fee chains, with smart contracts etc. Like good luck using Meteora DLMM pools and using CGT you'd cause an accountant an heart attack for just that one defi product. Majority of defi tools are highly intuitive and easy to setup, but cutting edge and never before seen in finance.
The UI/UX is geared to easy adoption, but using CGT methods that suit shares but have in no way adapted to this new currency/shares/commodity/security hybrid asset which can change and morph depending on the way its used -- is nightmarish. My job would be spending 98% of my time doing my tax, i'd have to stop after every action and it'd make trading/LP-ing/lending/perps/nfts/amm 2 days worth of tax for just a range of activities I can do within 15 minutes, just clicking a few buttons on different websites.
Like now i'm getting into fractionalized "NFTs" which have a Fungible token backing and you can trade for traits and components which might vary in perceived value but have no market history of testing whether that addition is actually worth something at all. So your NFT can swap into 1000 fragments, be partially or wholly swapped from a pool of NFTs of kind. It's a brand new token standard and system, you can swap back and forth mix and match unlimited times and create a months work for yourself without even knowing what the monetary outcome will be in context of a game or project that is ephemeral and lets say it does end up like a piece of art that happens to sell for alot, how do you even account for the complexities of how that is for your entirely unique asset which could be a gimmick reason or rarity syncronity in game that for an abstract reason ends up more valuable and you could mistakenly swap out a trait (which is its own assets upon an nft) without knowing it was valuable at the time etc.
Capitalizing on powerful tools is the game, and trading stock method fully captures any realized AND unrealized profit, sure it might hurt your profit harder than CGT, but it simplifies the hardest part of crypto, which is just being properly taxed on real value of assets on hand eofy, I don't think anyone can play around in DEFI land and everrrr end up with accurate CGT even if you gave them 3 years to figure it out, and then you'd have to start paying people for figuring out their tax and they'd have to become specialists at something very few people comprehend. When most of the people using these tools barely have a neuron firing or know what the very bare basics are, most don't know how a wallet works, or blockchain on the most basic fundamental level, but with 3 clicks they can play around with things that in their own gamified context make perfect simple sense, but from a data perspective would melt your face.
Much of what I do is costing me money to be involved in, with some incentivized participation not even being a given. But often enough through meeting people or just having your head in the right space, you end up having good outcomes spin off from that, and those things are usually far easier to account for like... and airdrop = 0 cost base for CGT or adds to eofy closing stock value and income tax for Trading Stock method.
Like much of my business expenses is learning through trial and error, and utilizing new tools without actually hunting profit, just getting an understanding before doing any serious plays. My big plays aren't the issue its the thousands and thousands of micro-crap that's wracking up making my way to a confident move.
Glhf :(
Hi @Lawman23
We'll know about your income/crypto transactions from you or sometimes third parties.
Ultimately, you'd report income from your investments in your tax return and you'd keep the records to back it up in case we need.
If you're after specific advice from us about how your crypto activities should be treated, we'll need more info from you to understand your situation. Get in touch with us for tailored technical assistance and in the meantime check out Crypto and your taxes.
That's actually a hot wallet. A cold wallet is a wallet that's never exposed to the internet and all transactions have been signed offline. Moving around crypto doesn't change tax status any more than moving your cash from your bed to your wardrobe. The ATO can find out because the blockchain is a public ledger and I assume the exchange is keeping records. Taxable events are when the crypto is swapped for something else or used as a payment. Even paying fees in crypto is a taxable event.
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