The crypto market has been a tough one over the last twelve months resulting in many taxpayers experiencing losses in regard to their crypto activity.  Some of these losses may have been realised through the actual sale, exchange, conversion or gifting of cryptocurrency whilst some losses may be sitting as unrealised with you still holding cryptocurrency but at a lower value due to market fluctuations. 

This article outlines how the Australian Taxation Office (ATO) are treating certain cryptocurrency activities which has an impact on what you can do with your crypto losses come tax time. 

How is cryptocurrency taxed? 

The ATO view regarding crypto currency is that it is a form of property and is therefore treated as a CGT asset (Capital Gain Tax) for tax purposes.  This means that it is the CGT provisions that we need to apply in order to determine the tax implications on any crypto gains or losses. 

The capital gains tax provisions operate to tax the ‘gain’ you realise on the sale of an asset. Your capital gain is quantified by taking the cost base of your asset from the capital proceeds you received from the sale. This difference is your capital gain and is subject to tax at your marginal tax rate. 

For example, if you purchase an apartment for $200,000 and later sell it for $300,000, your capital gain will be $100,000. 

If you make a loss on the sale, this loss can be used to offset other capital gains but cannot be deducted from your ordinary income (e.g. Salary and Wages). 

In the world of cryptocurrency, many different transactions involve the ‘disposal’ of crypto. These disposals may give rise to capital gains tax events, resulting in gains being realised and tax being payable on these gains. 

Investor versus Trader 

The taxation of cryptocurrency activity will be different for taxpayers subject to whether they are an investor or trader. 

The ATO’s attitude is that the majority of taxpayers will fall under the investor category.  This will be the case even if you regularly trade cryptocurrency.  The treatment is attached to the intention regarding your trading, which for investors is generally for personal investment and to achieve long-term gains. 

A trader is taxed differently with any gains or losses made being subject to income and not capital gains tax.  To be classified as a trader you need to demonstrate that you are carrying on your trading activities like a business.  Factors that support running a business include the nature and purpose of the activities being undertaken, the repetition, volume and regularity of the activities, whether a business plan exists and whether the activities are organised in a business-like way. 

So how are your losses taxed? 

If you are classified as an investor, any losses that you realise through the actual sale, exchange, conversion or gifting of your cryptocurrency are treated as capital losses.  These losses can be used to reduce any capital gains that you generate from cryptocurrency or other asset disposals in the same financial year.   

It is important to understand that capital losses you realise can only be offset against other capital gains.  Capital losses cannot be used to reduce other income you derive.  The saving grace is that if you don’t have any capital gains to apply the capital losses against, the losses can be carried forward to future years until such time that you do have a capital gain to offset against. 

If you are classified as a trader, any losses you realise may be used to reduce your other income, ie. the losses are not limited to just reducing capital gains.  Whilst the losses are not limited to being applied to capital gains, they can still be used to reduce any capital gains you generate in a financial year in addition to or instead of other income. 

You should be aware that there are rules in place that limit your ability to reduce your other income with losses you realise from your trading activity that are oustside the scope of this article. 

Realised versus Unrealised Losses 

It is only realised losses that can be used to reduce your capital gains and/or other income in a financial year.  Realised losses are those losses that have been crystalised through the actual sale, exchange, conversion or gifting of your cryptocurrency. 

Losses that you have incurred due to market fluctuations associated with cryptocurrency you still hold are unrealised losses.  Unrealised losses cannot be used until such time they become realised losses. 

For more information on some of the cryptocurrency transactions and how they are taxed, refer to our article Do you know how your Cryptocurrency is taxed? Or contact us on 03 52216399 to speak with one of our tax specialists. 

This article was written by Director Kylie McEwan.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Davidsons accepts no responsibility for any loss suffered as a result of any party using or relying on this article.