💡 Crypto traders don’t have capital gains
If you are actively trading crypto and are ‘in the business of crypto trading’ then you’ll instead need to treat your crypto as trading stock. You’ll still need to pay tax on your crypto transactions, but the calculations are done differently and most of this article won’t apply to you.
In practice, we see that the majority of individuals tend to be holding crypto for investment. If you’re unsure, we went through some of the important considerations in our article on crypto investment vs trading activity.
What is capital gains tax on crypto
The ATO has provided guidance that cryptocurrency is classified as a CGT asset in Australia. Other common CGT assets include shares and real estate. That means:
- buying crypto is the purchase of a CGT asset
- selling crypto is the sale of a CGT asset
- crypto to crypto swaps are barter exchanges of CGT assets
When you sell, swap or otherwise dispose of your crypto, then you’ll need to calculate whether you made a capital gain or a capital loss, and declare the outcome on your tax return.
A capital gain is when you sell a CGT asset that has increased in value from its cost, and a capital loss is when you sell a CGT asset that has decreased in value from its cost. Let’s look at a simple example, and then we’ll go into more details later on.
Example of a capital gain on crypto
If you bought crypto for $1,000 and later sold it for $1,200, then you would have a capital gain of $200.
Example of a capital loss on crypto
If you bought crypto for $1,000 and later sold it for for $900, then you would have a capital loss of $100.
These are the most important takeaways
- you have to actually sell or otherwise dispose of your crypto before there is a capital gain
- the gain is calculated based on the increase in value of your crypto
Although the concept of a capital gain might seem pretty simple, we’ll soon find the detailed calculations become a lot more complicated in practice.
Why does crypto have capital gains tax in Australia
In Australia, capital gains tax applies to crypto investments in the same way as it applies to other CGT assets held for investment, such as shares and property.
The tax law provisions that relate to CGT are found in the Income Tax Assessment Act 1997 (the Act), particularly Part 3-1 of the Act. These provisions outline the rules for calculating capital gains and capital losses, the tax treatment of CGT events, and the relevant exemptions and concessions that may apply.
It’s a bit hard to digest these rules straight from the legislation, which is why the ATO releases guidance such as their guidance on crypto investments, and it’s also why we publish articles to help make crypto tax understandable for Australian investors.
How much is capital gains tax on crypto in Australia
We’re often asked, how much is capital gains tax on cryptocurrency? Well, there’s actually no separate tax rate specifically for capital gains. Capital gains are just considered another source of income, in the same way that your salary, dividends and bank interest are all sources of income.
Each financial year, all your sources of income are added together to get your total assessable income.
Once you know your total assessable income, you then get to subtract any allowed deductions which will result in your total taxable income. You’ll then pay tax based on your marginal tax rates.
The ATO has explained the marginal tax rates in Australia, but they can be a bit confusing at first.
Marginal tax rates work a bit like tax buckets that you fill up with your taxable income. For the 2023 financial year, the tax buckets work like this:
- your first $18,200 of your taxable income is taxed at 0% (that means no tax)
- your next $26,800 of your taxable income is taxed at 19%
- your next $75,000 of your taxable income is taxed at 32.5%
- your next $60,000 of your taxable income is taxed at 37%
- any additional taxable income over that is taxed at 45%
Even if you have $1,000,000 in taxable income, you’ll still get to fill up your first tax bucket. That means $18,200 of your $1,000,000 still gets taxed at 0%. Then the next $27,000 will be taxed at 19% and so on.
The calculation will differ a bit in practice due to the impact of various tax offsets and the medicare levy, but this is the overall concept and not too far from the truth.
You can use online tools such as pay calculator to get a more accurate estimate on your total tax payable. If you want a perfect estimate, then you could ask your tax accountant to run through a tax planning scenario with you.
Long-term vs short-term capital gains on crypto
Not all capital gains are equal.
The terms short-term and long-term capital gains refer to the length of time that your crypto investment has been held before it is sold. This distinction is important because the tax treatment of capital gains is different depending on how long you held your crypto assets.
Short-term capital gains are gains from the sale of CGT assets that have been held for 12 months or less. Short-term capital gains have no special tax treatment, and the total gain will be included in your assessable income when you prepare your tax return.
Long-term capital gains are gains from the sale of CGT assets that have been held for more than 12 months (one year), and are eligible for the capital gains tax discount.
Capital gains tax discount
The capital gains tax discount is a tax concession available to individuals, trusts, and superannuation funds that have held a CGT asset for more than 12 months. The discount rate depends on the type of entity.
💡 CGT discount for different entities
Individuals - 50%
Trusts - 50% (when passed through to an individual)
SMSF - 1/3 (~33.33%)
Company - not eligible
With gains being discounted by 50% for individuals, this is one of the most important tax concessions to avoid overpaying tax on your crypto investments.
12 month + 1 day rule
You must hold your crypto for longer than 12 months to be eligible for the CGT discount. If you want to time your disposal to the day, then you will need to understand exactly how the 12 month rule works.
Let’s look at a simple example:
Sarah purchases 1 BTC on 1 March 2022 at 6pm.
Sarah now wants to know the absolute earliest date that she can sell, and still be eligible for the CGT discount.
To satisfy the 12 month rule, Sarah must wait until 2 March 2023 to sell her crypto. The time has no impact as the requirement is day based.
Can I claim a capital loss on crypto
A capital loss will occur when you sell or dispose of your crypto for a lower price than what you paid for it. This usually means that the value of your crypto has decreased and the disposal will result in a capital loss.
Capital losses from crypto can be used to offset capital gains, which effectively reduces the amount of tax that will be owed.
Capital losses can be used to offset capital gains in the same financial year. Otherwise, if there are more losses than gains, they can be carried forward to be used in a future financial year.
Unused capital losses can be carried forward indefinitely, so it is important to keep records of all capital gains and losses for future use.
⚖️ Tax optimisation opportunity for capital losses
When applying capital losses, you get to choose which capital gains to apply them against.
If you have both short-term and long-term capital gains in a given financial year, then you have the ability to select which gains to offset with the available capital losses. Whenever there is choice, there is an opportunity for tax optimisation.
This is important, as capital losses are best utilised by first offsetting the short-term capital gains before offsetting the long-term capital gains.
Use Syla to make sure you get this important tax optimisation, that is only implemented by tax calculators that are designed specifically for Australian tax law.
You must apply capital losses against your short-term and long-term gains, before applying the 50% CGT discount on the remaining long-term capital gains that are eligible for the discount.
How to calculate capital gains & losses on crypto
To calculate a capital gain or loss, you subtract the cost base (usually the amount paid plus fees) of the crypto being sold, from the sale price of the crypto. This will give you either a capital gain or a capital loss.
⚖️ Formula for capital gain
Net capital gain/ loss = Net Proceeds - Cost Base
Let’s look at some real life examples to understand this further.
💡 Example of a short-term capital gain
On 1 June 2022, you buy 1 Bitcoin (BTC) for $50,000, plus a brokerage fee of $100.
Cost base = $50,000 + $100 = $50,100
In 2 months time, on 31 July 2022, you decide to sell 1 BTC for $60,000, plus brokerage fee of $110.
Net proceeds = $60,000 - $110 = $59,890
The net capital gain for the disposal of 1 BTC is determined by subtracting the cost base from the net proceeds.
Net capital gain = $59,890 - $50,100 = $9,790
Given that you held the 1 Bitcoin for less than 12 months, you would not be eligible for the 50% CGT discount.
This means that you will have to declare the full gain as assessable income in your 2022 income tax return.
💡 Example of a long-term capital gain
Assume the same facts as above but you bought your 1 BTC at a much earlier date on 1 February 2021 for $40,000, plus brokerage fee of $150.
The cost base per BTC is calculated as:
Cost base = $40,000 + $150 = $40,150
The net proceeds for this transaction are calculated as:
Net proceeds = $60,000 - $110 = $59,890
The capital gain for the disposal of 1 BTC is determined by subtracting the cost base from the net proceeds.
Net capital gain = $59,890 - $40,150 = $19,740.
As the 1 Bitcoin was held for more than 12 months, the capital gain is eligible for the 50% CGT discount.
Provided the gain is not otherwise offset by available capital losses, you will be able to apply the 50% CGT discount.
Net capital gain = $19,740 * 50% = $9,870.
The amount of $9,870 will be included in your assessable income in your 2023 income tax return.
💡 Example of a capital loss
On 6 September 2021, you decided to buy 40 Solana (SOL) for $8,000 plus brokerage fee of $80.
The cost base for all 40 SOL is calculated as:
Cost base = $8,000 + $80 = $8,080
In 4 months time, due to a downturn in the market, on 30 June 2022, you decide to sell all 40 SOL for $4,000, plus brokerage fee of $40.
Net proceeds = $4,000 - $40 = $3,960
The net capital loss for the disposal of 40 SOL is determined by subtracting the cost base from the net proceeds.
Net capital loss = $3,960 - $8,080 = -$4,120
Let’s assume you have a total of $8,790 long-term capital gains available from the sale of other crypto assets that you sold during the course of the financial year.
As your long-term capital gains and capital loss falls into the same 2022 income year, you are able to offset your capital loss against your capital gains.
The rule of subtracting capital losses is that they must be applied before applying the 50% CGT discount. Your net capital gain after applying capital losses will be:
Long-term capital gain (before 50% CGT discount) = $8,790
Less: Net capital loss (current year) = -$4,120
Remaining long-term capital gain = $4,670
CGT discount = -$2,335
Net capital gain = $2,335
Your net capital gain of $2,335 will be included as your assessable income in your 2022 income tax return.
The last example demonstrated how capital losses must first be applied against long-term capital gains before taking into account the 50% CGT discount.
In some situations, you may have both short-term and long-term capital gains, in which case it usually makes more sense to use the capital losses to first offset the short-term capital gains, and to preserve the long-term capital gains that are eligible for the discount.
Let’s demonstrate using the same facts above and assume you have realised both short-term and long-term capital gains with a capital loss in the same year.
Example of applying capital loss to offset gains
Take the following situation for a given financial year:
- Zero carried forward losses from prior years
- Capital losses that total $4,120
- Short term capital gains that total $3,930
- Long term capital gains that total $8,790
Let’s see what happens if you use the capital loss to first offset the short term capital gains
💡 Case 1 - First offset short term capital gains
Total short term capital gains = $3,930
less available capital losses = - $3,930
Total long term capital gains = $8,790
less remaining capital losses = -$190
less 50% CGT discount on remaining long term capital gains = -$4,300
Assessable income = $4,300
Now let’s see what happens if the capital losses were instead used to offset the long term capital gains.
💡 Case 2 - First offset long term capital gains
Total long term capital gains = $8,790
less remaining capital losses = -$4,120
Total short term capital gains = $3,930
less available capital losses = - $0
less 50% CGT discount on remaining long term capital gains = -$2,335
Assessable income = $6,265
So which scenario would you prefer?
On deciding which order to apply capital losses we achieved a result of $1,965 less assessable income by choosing to first offset the short-term capital gains. In general, we always expect this strategy to be more tax-effective.
How to minimise capital gains on crypto
The best way to minimise capital gains tax on your crypto investments is to hold them for longer than 12 months, as this will give access to the 50% CGT discount.
For other ways to minimise your crypto tax, see the 10 most effective and legal strategies to minimise crypto tax.
Use crypto tax software to calculate capital gains
Capital gains calculations are painfully time-consuming in practice, particularly for crypto. If you’re not careful, you may end up calculating your capital gains incorrectly, or even worse, you may be missing out on important costs to offset.
Instead of doing capital gains calculations by hand, or in a spreadsheet, use Syla as your capital gains calculator for crypto.
Syla ensures you are correctly recording and reporting your capital gains, and that you never overpay more tax than you are legally required to pay.
Australian crypto investors are able to use Syla’s crypto tax calculator for accurately determining their crypto capital gains and losses. Syla’s exclusive Lowest Tax First Out (LTFO) ensures that you pay the lowest crypto tax on your capital gains.
