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How do I calculate capital gains tax on cryptocurrencies?

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Started August 2018 by
Modified September by

Question

Hi! If I make an investment in crypto, say $50,000, and that crypto investment increases in value to be worth $1,000,000, how do I work out how much tax I'll need to pay? Is it true that if I hold on to my crypto for 12 months or more that the amount of tax I have to pay is halved?

I also have read that if I sell some of my crypto to buy a car (for example) CGT wouldn't be payable - is this true? What if I sell the crypto to buy a house? Would that be treated any differently?

Answer

Great questions! Before we start, a couple of caveats: 

  1. The following information applies if you’re an investor in cryptocurrencies, rather than a trader. If you’re a trader, you’re considered to be in the business of trading cryptocurrencies, and different rules apply
  2. We’re using his example here, but obviously different scenarios will apply the information differently. We have a range of tools and guides available, so we encourage you to do your due diligence and make sure you understand how the rules apply to your situation. 

You’re correct that cryptocurrency is not a form of money/currency for tax purposes. Under existing legislation, cryptocurrency is considered to be a capital asset, and capital gains tax rules apply on the disposal of these assets. 

If you invested $50,000 into cryptocurrency and made $1,000,000 on your investment, firstly, congratulations! Secondly, the original $50,000 would become part of your cost base. The cost base includes a range of expenses associated with purchasing (or ‘acquiring’) your asset: 

  1. Money paid or property given for the CGT asset
  2. Incidental costs of acquiring the CGT asset or that relate to the CGT event
  3. Costs of owning the CGT asset
  4. Capital costs to increase or preserve the value of your asset or to install or move it
  5. Capital costs of preserving or defending your title or rights to your CGT asset

If you’ve paid other capital costs to acquire or own your cryptocurrency, these will also be included into your cost base. 

Once you’ve worked out your cost base, you take its value from your capital proceeds (or what you make on the disposal of your cryptocurrency) to establish if you’ve made a capital gain or a capital loss. If you’ve made a loss, you’ll also need to work out your reduced cost base.

If you make a capital gain, you’ll need to work out if you’re entitled to a CGT discount. If you’ve owned your cryptocurrency for more than 12 months, you can either discount your capital gain by 50% or establish what indexation factor you can apply against your capital gain. You use whichever method provides the best outcome for you. 

If you’ve owned your cryptocurrency for less than 12 months, you must use the ‘other’ method, where you simply subtract your cost base from your capital proceeds. 

Once you’ve worked out your capital gain or loss: 

  • You either use your capital loss against an existing capital gain, or carry it forward to a future year. If you carry a capital loss forward, you must apply it to your next available capital gain. 
  • You add your capital gain in with the rest of your taxable income, and you pay tax on your total taxable income for the year. The tax will be applied at standard marginal rates - so if you earn more than $180,001 overall that year, you'll pay the highest rate; if you make more than $18,201 but less than $37,000, you'll pay tax at 19%.

Using your example and simplifying the situation: 

  • If your total cost base was $50,000, you take this away from $1,000,000 for a capital gain of $950,000
  • If you held your cryptocurrency for more than 12 months, you apply a CGT discount of 50% = $475,000 net capital gain
  • Add your net capital gain to the rest of your taxable income - let’s say your total taxable income for the year was $97,663 because you had some deductible expenses. $475,000 + $97,663 = $572,663
  • Apply tax at the relevant marginal rate. If you earn more than $180,001 for the year, you pay $54,097 in tax + 45c for each dollar over $180,000 = $230,795 tax payable.

CGT always applies on capital assets, regardless of how long you hold them. You’re only entitled to a CGT discount when you hold the asset for more than 12 months. 

Finally, ‘disposal’ occurs when you sell, gift or trade cryptocurrency - even if you don’t receive any money for it. When you swap one cryptocurrency for another, you’re considered to have disposed of one cryptocurrency and acquired a new one, which means that CGT applies. The same is true where you gift someone some cryptocurrency - the ‘market value substitution rule’ applies, and you’ve taken to have received the market value of the asset at the time you gifted it. 

If you buy an asset with cryptocurrency that you’ve used for investment purposes, you’ll need to calculate the value of the cryptocurrency according to a reputable exchange and then convert this amount into Australian dollars and report it on your tax return. 

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