Capital losses on crypto
For the majority of Australian investors who are holding crypto for long-term investment, they are subject to capital gains tax. That means they must calculate their capital gains and capital losses from their crypto.
A capital loss on crypto occurs when a crypto investment decreases in value and the investor sells the crypto for less than they paid for it. For example, if an individual purchased one Bitcoin for $50,000 and later sold it for $40,000, they would have a capital loss of $10,000.
Capital loss vs revenue loss
For the minority who are actually carrying on a business of buying and selling crypto, such as a crypto trading business, then the profits are ordinary income and not capital gains.
In some instances, your crypto activity can still be treated as ordinary income due to undertaking isolated profit making activities.
The tax treatment of your crypto losses will depend on the nature of the activity. For most individuals, this would be the decision between whether you are an investor or a trader.
Revenue losses on crypto
Where you are carrying on a business activity with crypto, then your disposals of crypto will be sales and any resulting losses may be deductible.
As a crypto trader undertaking a business activity, your crypto is considered trading stock that is used in the ordinary course of your business. As such, your purchases of crypto are deductible expenses and your sales of crypto are ordinary income.
Some common examples of crypto business activities include:
- day trading
- algorithmic trading
- mining
- digital currency broker
- NFT creators and artists
How to know your crypto activity is a business
The general principles the ATO looks at when determining whether someone is in the business of trading in crypto are:
- you have a business plan and strong intention to make a profit
- the activities are conducted in a business-like manner
- the regularity and frequency of transactions, including the size and scale of operations
- you keep records of all transactions
See our article on crypto trader vs investor tax treatment in Australia to learn more.
Investors can claim a capital loss on crypto
Capital losses can only happen when you dispose of your crypto, usually by selling, swapping or transferring ownership.
Due to the volatile nature of the market, your crypto investments may decrease in market value while you still hold them. These adverse changes in value are called unrealised losses as the crypto has not yet been disposed, and so they can’t yet be claimed as a capital loss on your tax return.
A capital loss will only occur when the asset is actually disposed, and the proceeds from the disposal are less than its original purchase cost. When this happens, we say that the capital loss has been realised, and it can now be used to offset against capital gains in that income year.
You can’t use capital losses to offset against other forms of income such as salary or wages.
Capital losses on crypto can be offset against capital gains made in the same financial year or they can be carried forward to be offset against future capital gains.
Capital losses can be carried forward indefinitely, until they are used. It’s important that you declare the carried forward loss on your tax return.
Using a capital loss to offset a capital gain
There are two types of capital gains:
- short term (held less than 12 months)
- long term (held greater than 12 months and eligible for the 50% CGT discount)
As an investor, you are free to choose whether you use your capital losses to offset your short-term or long-term capital gains.
Where you have both short-term and long-term capital gains, you would normally choose to first offset your capital losses against all your short-term capital gains. This will lead to better overall tax outcomes, as it will preserve your long-term gains that can still be discounted by the 50%.
Here’s the strategy you should use when offsetting capital gains:
- first, use your capital losses to offset your short term capital gains
- then, use any remaining capital losses to offset your long term capital gains
Here’s an example:
- John has a $15,000 capital loss, $5,000 in short term capital gains and $30,000 in long term capital gains.
Let’s apply the most tax effective strategy:
- The $5,000 short term capital gain is offset to $0. There is now $10,000 in capital losses remaining.
- The $30,000 in long term capital gains is offset to $20,000 using up the remainder of the capital losses.
- The $20,000 in remaining long term capital gains is discounted by 50%, resulting in a final capital gain of $10,000 being declared on John’s tax return.
Read our article on how to calculate capital gains on crypto to find out more.
Traders can claim a revenue loss on crypto
If you are operating a business of trading crypto and you end up with a net trading loss, then this will be treated as a business loss. Generally, if you are in a business that makes a loss, you can carry forward that loss and claim it in a future income year when you do eventually make a profit.
When you are an individual in business, you may be eligible to offset your business loss against your other sources of income including your salary. To achieve this though, you must satisfy the non-commercial business loss rules.
If you are able to satisfy at least one of the relevant tests, then your business losses can be offset against your other income such as salary, wages, dividends or capital gains. This is a huge tax benefit, and definitely worth pursuing when eligible.
Non-commercial business loss rules
A non-commercial loss is a loss you incur, as an individual or in a partnership, in a business activity that is separate to your other sources of income.
The non-commercial business loss requirements are:
⚖️ Non-commercial business requirements
You can offset your non-commercial business loss against your other income provided:
- your taxable income is less than $250,000
and
You satisfy at least one of the following tests:
- Assessable income test: your assessable business income is at least $20,000 in the current income year; or
- Real property test: your business uses, or has an interest in, real property worth at least $500,000; or
- Profits test: your business has produced a profit in three out of the past five years (including the current year); or
- Other assets test: your business uses certain other assets (excluding motor vehicles) worth at least $100,000 on a continuing basis.
If you do not meet the requirements of the non-commercial loss rules, then your business losses are quarantined and are carried forward to future years.
If your crypto business makes a profit in the following year, then you can use the carried forward loss to offset the profit.
Crypto losses from isolated profit-making activities
In some cases, you can hold your crypto on revenue account when undertaking isolated profit making activities that do not amount to a fully fledged business activity.
If your crypto losses relate to an isolated profit making activity, then you are able to deal with those losses on revenue account, where you can offset them against your other income like salary or wages, without having to satisfy the non-commercial loss rules.
There is limited ATO guidance on situations where you can claim losses on isolated crypto transactions entered into for the purpose of making a profit and how to distinguish them from an investment activity.
What is a profit-making activity
There is case law that has historically decided on the capital vs revenue distinction and deals with this issue more generally.
The leading case Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199; 87 ATC 4363; 18 ATR 693 (Myer Emporium) cited an important principle that gains or losses from isolated transactions can be treated on revenue account provided the transaction was entered into:
- with a profit-making motive; and
- in a business-like or commercial manner.
The ATO then issued Taxation Ruling TR 92/4 Income tax: whether profits on isolated transactions are income (TR 92/4) which sets out circumstances in which losses from an isolated commercial transaction may be claimed on revenue account.
⚖️ Case law
The 2020 Full Federal Court decision in Greig v Commissioner of Taxation [2020] FCAFC 25 (Greig) allowed a tax deduction for losses incurred on the disposal of shares from an isolated transaction, based on the Myer Emporium principles.
This means the loss made on the disposal of the shares was found to be on revenue account and therefore deductible.
The important issue considered was assessing whether an isolated transaction constitutes a “business operation or commercial transaction”.
Although the Greig’s case dealt with shares, the principles from the case are likely to be applicable to crypto, and are important to determine whether a crypto loss can be treated on revenue account.
Based on the case, there are two key requirements that Australian taxpayers would need to demonstrate for crypto losses to be treated on revenue account and deductible:
- whether there is a profit making intention when the crypto is acquired
- whether the crypto was acquired and used in a business-like or commercial manner.
Both requirements include looking at the purpose for acquiring the crypto and will depend on if the crypto was acquired, held and disposed of in a business-like or commercial manner.
The outcome will always depend on the individual facts of the taxpayer.
Losses from derivatives contracts may be claimed as a revenue loss
Investors that engage in futures trading, margin trading and Contracts for Difference (CFD), may find there is limited guidance provided by the ATO on how losses from these activities would be treated for tax in Australia.
If you are a crypto trader making gains and losses from trading futures, and other derivative instruments, then your net loss for the year may be deductible as a revenue loss.
CFDs are a bit more complex, and are discussed in an ATO ruling on CFDs called Taxation Ruling TR 2005/15 Income tax: tax consequences of financial contracts for differences. The ruling discusses factors such as how business-like you are in your activities, frequency of trading and the commercial nature of the transactions.
Importantly, there is a very clear difference between a crypto derivatives product, and an actual crypto asset. Claiming a loss will depend on your individual circumstances, where you would need to seek professional advice to correctly determine your tax position.
💡 If you’re using a tax agent, then make sure they are correctly declaring your revenue losses where eligible.
What about lost, stolen or scammed crypto
As an investor, you’re allowed to claim a capital loss on lost, stolen or scammed crypto. You’ll just need to keep appropriate records of what happened.
The claim for a capital loss is possible in situations where there is no chance of the lost crypto being replaced or compensated. That means there is genuinely no hope of retrieving it and it's permanently gone. In that case, you can usually declare a capital loss for your lost crypto in your income tax return.
It’s not enough for the token to be almost worthless to claim a loss. If there is still a market price for the token, then there is still value. In that case, you’ll need to sell the crypto to realise the loss.
Our tax team went into a more detail on how to claim unrecoverable crypto.
How to report your crypto losses
Income tax loss rules are complex, particularly for crypto and when trading derivatives. If you’re unsure of your tax position when it comes to claiming your crypto losses, then you’ll need some help.
It’s important to have good crypto tax software for recording your transactions. That’s true regardless of whether you are an investor or trader, and whether your incurring capital or revenue losses.
If you want to make sure your crypto losses are claimed correctly, then you’ll need to use a crypto tax calculator that is specific to Australia. Tax law is very complicated, so the best crypto tax software is only focused on a single country.
The only crypto tax software that is focused exclusively on Australian tax, is Syla.
You can use Syla to calculate your crypto tax losses by:
- importing your transactions and loss events into Syla
- Syla will automatically calculate and legally maximise your losses
- download your Crypto Tax Report for your tax agent or use it yourself to lodge your tax return in myGov
You can sign up for a free account in Syla
Tips when claiming large crypto losses
There’s always a risk when claiming large crypto tax losses, that you may be at an increased chance to trigger an audit from the ATO.
When claiming a large crypto loss, there’s a few things you need to do to make sure all your bases are covered:
- ensure you have all your crypto records in good order
- be confident in the tax treatment of your crypto activities by seeking professional advice
- use crypto tax software that actually meets ATO expectations, otherwise there may be disagreement on the tax calculations.
Syla is the best choice for Australian investors, since it’s tax logic is designed specifically and only for Australian tax law.
If you are expecting a review or audit from the ATO, then you really should use a tax agent to assist you. A tax agent will make sure things go smoothly and you’ll also be able to request audit insurance. Get in touch with our team if you need some recommendations.
