I know that a lot of Bitcoin investors have trouble navigating the tax code. After all, trying to go through all of the ATO’s guidelines can be stressful.
This isn’t financial advice and I encourage everyone to do their own research but I wanted to take some time to discuss a few misconceptions I’ve heard about crypto tax law.
Misconception #1: There’s no need to pay taxes on your crypto — how’s the ATO going to catch you?
All major Australian exchanges and wallet providers abide by Know Your Customer laws. The information you provided when you signed up for these services is given to the ATO.
That’s how the ATO is able to send warning letters to hundreds of thousands of crypto investors who aren't paying their taxes in full.
Look, I wish we lived in an ideal world where none of us had to pay taxes. But it’s something we should be doing. After all, there are severe consequences for tax fraud — the maximum penalty is ten years imprisonment!
Misconception #2: You only need to report your taxes if you cashed out to fiat AND you made a profit.
There are a few different things wrong with this statement.
First of all, trading your cryptocurrency for other cryptocurrencies is considered a taxable event. If you trade Ethereum for Bitcoin, you’ll need to pay capital gains based on how much your Ethereum tokens have gone up since you originally received them.
Also, any kind of cryptocurrency income needs to be reported on your income taxes. This might include tokens you received via airdrop, tokens you received through staking or mining, or tokens that you received as compensation for your work (if you happen to have a cool employer).
Finally, there’s a tax advantage to reporting crypto losses. Capital losses can offset any capital gains for the year. If you end up with a net loss for the year, you can roll it forward to offset your gains in future years!
Misconception #3: It’s easy to write off your taxes with the personal asset use case exemption!
You may have heard about the personal asset use exemption.
It works like this: If you buy less than $10,000 worth of cryptocurrency for the purpose of buying a “personal use good”, you can write it off your taxes.
Unfortunately, it’s really hard to use this exemption for cryptocurrency because the ATO’s guidance on it is so strict. You pretty much have to buy your Bitcoin and spend it on a “personal use” item like food or clothing on the same day for this to work.
Since most Bitcoin investors hold their tokens for a long period of time, very few people are actually able to use this exemption.
Anyway, if you’re interested in reading more about how Bitcoin and other cryptocurrencies are taxed in Australia, I would recommend this guide. It’s very comprehensive!
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