The answer is maybe. First things first: if your profits from cryptocurrency investments are above $10 in any given financial year, then these assets are subject to capital gains tax (CGT). You will be taxed according.
What is a Taxable Event?
Every time you sell your cryptocurrency holdings, this is called a “disposition”. The Australian Taxation Office (ATO) has a pretty broad definition of what they consider a “disposition”.
In some cases, you may incur a capital gains tax liability just by selling your cryptocurrency for cash (let’s say you sell bitcoin for AUD). There are other situations where you may also incur a capital gains tax liability if you gift your cryptocurrency to another person.
When Do You Need to Pay Tax on Your Cryptocurrency Gains?
If you’ve made a profit on your cryptocurrency investments this financial year, you will need to declare this on your tax return.
You will also need to declare the amount of cryptocurrency you have left in your portfolio at the end of the year.
Most crypto exchanges will provide you with a report that details the value of your crypto holdings at the end of each month.
This will make your tax declaration process much easier. You will also need to declare any capital losses that you incur.
You can use these losses to offset any capital gains you’ve made, which will in turn reduce your tax bill.
What Are Your Tax Losses?
Every time you sell a cryptocurrency investment, the difference between your original cost and the sale price is a capital gain (or loss).
If you’re selling at a loss, this is a capital loss. You can use these losses to reduce any capital gains you’ve made, which will in turn reduce your tax bill.
This means that if you’ve made a profit on your cryptocurrency holdings, you can reduce your tax bill by deducting the number of your capital losses from this profit.
Should You Just Cash Out and Pay the Taxman Now?
As with most things related to finance, it’s important to weigh up the pros and cons of each decision you make.
If you cash out your cryptocurrency holdings at the end of the financial year, you will be incurring a one-off capital gains tax liability that you may not need to pay if you hold onto your cryptocurrency.
And if the value of your crypto-holdings continues to increase throughout the year, you could incur a sizable CGT liability if you sell now.
Is There Any Way to Minimise or Avoid This Tax Bill?
If your cryptocurrency investments have increased in value, you can avoid incurring a CGT liability by keeping your cryptocurrency holdings and not selling them until the end of the financial year.
However, you will need to keep good records of the value of your crypto holdings at the beginning and end of the year.
As mentioned above, most exchanges will provide you with a monthly report that details the value of your crypto holdings.
If your crypto investments have decreased in value, you can still use your capital losses to reduce your capital gains.
If your crypto investments have decreased in value and you don’t have any capital gains to offset, you can still use your capital losses to reduce your other taxable income in the same way that you would if your crypto investments had increased in value.