How Is Crypto Taxed? Investing & Trading

So, Revenue and Capital.

These are terms that as accountants we’re very familiar with but they might be a little bit foreign to you.

So, what that means is that within the tax world, we obviously (we generally), have sort of two categories of income and gains (or profits and gains) and that’s revenue world over here, capital world over here.

So try to make it as simple as possible.

Revenue world is when you’re going out, say it’s like an employee, earning (earning) some income or you’re earning dividends from investments or you’re conducting a business and you’re turning over assets providing services and you’re bringing income in.

Capital world is when you’ve gone out and bought something generally the longer term position of holding that asset and looking for it to appreciate and value.

Okay, and also if you’re going out in an unsophisticated way – buying something and really speculating (another term might be gambling) on the appreciation of the asset – and just having a punt think it’s (think it’s) going to go up, but you’re not doing anything in a very technical, sophisticated manner that’d the capital world.

So, when it’s in capital world – investing or speculating – which is what the (most) majority of people in crypto are doing is those gains and losses are subject to the capital gains tax regime.

Okay, so there’s no separate capital gains tax. So, all these gains and losses and stuff, they’re (they’re) all taxed at whatever your marginal tax rate is, but they’re subject to the capital gains tax world.

So, within that world is CGT discount, which I mentioned earlier in this course, which is the 50 percent discount that you might otherwise be available to, as opposed to if you’re in the revenue sort of world that CGT discount isn’t available.

Another sort of a really important thing from this world, and capital world, is that whenever you have losses, so, whenever you have losses from investing and speculating that are capital losses, those losses are not available to reduce your taxable income from other income.

If you make a $1,000 loss and you’ve got, say, $100 000 of taxable income, so your salary is $100,000, for the sake of simplicity, you cannot use that capital loss of $1,000 in this example to only pay tax on $99,000.

Unfortunately, that loss, capital loss, can only be used against other capital gains. If you don’t have other capital gains, what you get to do is get to carry forward that capital loss until future tax year. It might be next year or might be the year after that or 10 years. You just keep getting to take it forward until eventually got a capital gain to claim against.

The other really big thing, in capital gains world, is if you’re a speculator or investor, if you’ve got paper gains / paper losses – another term for them is realised or unrealised. Sorry, unrealised, I should say. So realised means that you’ve actually had disposal if it’s just on paper, or let’s say a few weeks ago, I bought Bitcoin for $10,000 and today it’s only worth $8,000, but I still own that Bitcoin then I’m only sitting on an unrealised $2,000 loss (or $2,000 paper loss); and now we switch over into a new tax year, that paper loss, (I don’t) I can’t use that paper loss to reduce the realised gains I might have made in that earlier year. It’s simply not available.

But, the way to look at it is, if you’ve got a paper gain (unrealised gain) you’re also not paying tax on that.

Okay, the difference when we’re talking about a business. (So the business might be accepting Bitcoin in your business.). So if you’re accepting Bitcoin in your business the disposal of that Bitcoin, that’s just (it’s a) sale proceeds.

Okay, the cost of that Bitcoin would have been related to whatever you gave up.

When you bought the Bitcoin. So if I provided an accounting service worth $1,000 and I got paid $1,000 in Bitcoin, then the cost of my Bitcoin is $1,000. And then when I sell it, let’s say the Bitcoin is now $1,500. I have $1,500 in my sales, I have $1,000 on my expenses related to that Bitcoin. $1,000 on my sales for the accounting service as well.

Okay, so it’s treated as trading stock.

But, I suppose a lot of people in crypto, what they’re doing is they’re doing a cryptocurrency business. So it might be day trading, swing trading, using bots to trade, various different mechanisms. So if you’re doing these things, and it actually is, it’s a pretty high bar, to be classified as carrying on a business. You have to do a lot of repetition, you have to have real sort of business plan, means of how you’re getting to how you’re going to make these profits. You don’t necessarily have to make profits. You have to have, a really clear plan on how you’re going about this.

Basically, the courts have set out a number of different criteria when you’re carrying on a business. And it can be a little bit difficult to get into. I’d say most people, when they’re getting into crypto, are just investing or speculating. They’re not necessarily carrying on a business.

But, if you are carrying on a business, you’re over in revenue world, means the CGT discount is not available for your assets, which probably isn’t too much of a big deal because it’s highly unlikely that you’re going to be holding your assets for longer than 12 months.

I suppose the point can be made that you actually can sit in both worlds, you can have a business and still have an investing portfolio sitting over here. We would say to make this a little bit clearer, and say you, you look at your structuring options. Have a look at further into this course around those things.

But, I suppose when it comes to the business, then you’ve got your sales, you’ve got your expenses, you run through those things, much like every other business, and you put them in the business schedule tax return.

Now, there can be this sort of third criteria, third category, I should say, which is profit-making intent.

This is where you’re a little bit more sophisticated than an investor, but you’re not so repetitive that you’re in business. It might be that you find a short term window that might last only a month.

Let’s, say for example, (and) there’s price arbitrage available. So, what that means is just that on Exchange A and Exchange B, the price of Bitcoin, they’re different. It really shouldn’t be for whatever reason, but you’re able to sell over here and buy over here and take and make a profit and you just keep repeating this process and you’re able to do that for one month, one week, two months or whatever, just a short period. Because you’re doing this clearly for only to gain a profit, tax law goes, that’s a profit making undertaking.

So, you’ve got to put that in the tax return as such.

And the other aspect is also if you’re using sophisticated instruments, we like to call them financial instruments (margin trading) anything pretty much to do with leverage: futures, derivatives. These sort of things, instantly, you’re not actually owning the cryptocurrency in a lot of these instruments, you’re getting exposure to these assets, and those exposure profits and losses that you make there, they’re not within the capital gains world generally, they’re within profit making world. Or, if they’re like, if you’re doing this on a very regular basis, decent scale, that would be business world.

Business and profit making world, pretty much very similar outcomes there. I suppose the key sort of difference would be that when we’re talking about business, there’s these rules called the non commercial business loss rules. There, which might prevent you from using a business loss to offset your other income.

So you’d have to look into those, that would be outside the scope of this course.

So what I would suggest to you is that you do seek some tailored advice if you’re possibly sitting in those worlds.

But oftentimes, just, as a general remark, you probably, not necessarily going to be caught by those non commercial loss rules because one of the (one) ways to get over that is assessable income over $20,000. When it comes to crypto, the rapid nature of doing those trades, you’d soon exceed that limit.

The other part would be you’d wanna not exceed the $250,000 income limit for those rules (to look into).

Otherwise, the thing about business profits and revenue profits is that actually, I should say losses, you’ve got losses in those aspects, ordinarily, those losses can offset other income.

If I’ve got a $10,000 loss from margin trading and I’ve got $100,000 of employment income, for example, I’m actually only going to be paying tax on $90,000 because I can use that $10,000 loss from losses of margin trading to offset my employment income.