If you’ve made a gain on crypto, you might be wondering what your options and possibilities are. In this third part of our four-part series, our tax law specialist, Adam Ahmed, discusses the most frequently asked questions for crypto gains.
Question 1: Is inflation taken into account at all?
Inflation is characterised by a rise of the general level of prices, which then equates to a decline of the purchasing power of a currency. In 2021, inflation was sitting at about 3.5% for the year when calculated through the Consumer Price Index.
If your crypto assets had also risen 3.5% in value over the same period, you might then argue that you haven’t actually made a gain because its real value (compared to other goods and services in the economy) has stayed the same. If you were to cash out on the gain and spend it on goods such as groceries, the amount you would be able to buy with your crypto would not have changed.
However, the ATO expects you to pay tax on your nominal gains and it therefore does not take into account inflation. The tax laws are rigid and designed to tax you on any increase in the Australian dollar, nominally.
Question 2: If you’ve made a gain, how would the ATO find out?
The ATO may or may not find out that you’ve made a gain on crypto when you actually make it. However, when you actually come to spend the money, the ATO will find out. This is because it will need to somehow materialise in your account and they will question where it came from. This is especially true if the amount you’re going to spend is high compared to what your income or spending usually is.
It makes more sense to follow the rules and focus on what your rights and obligations are. It’s important to have the right framework in place. That way you will be prepared if the ATO questions you or wants to see relevant evidence.
Australia’s tax laws are based on a self assessment system where the taxpayer is expected to work out what their own tax should be and then notifies and pays the amount to the ATO.
However, the ATO auditing powers are extensive. If they provide you with a number, which may or may not be correct, it takes a lot of time, energy and evidence to try and prove them otherwise.
Question 3: Then what can you actually do if you’ve made a gain?
The possible approaches depend on whether the gain is realised or unrealised, and also on the unique facts of the situation.
In Australia, we have set options for things to be categorised in and then taxed accordingly. Things such as crypto, which don’t fit neatly in a box, have multiple possibilities and also risks.
Since the courts have said that it is not treated as a foreign currency, there are different possibilities for how it may be treated. It is most similar to shares, although there are some obvious differences between the two because shares are not being used to purchase other goods and services the same way crypto is.
From the ATO perspective, the default is to treat it as a capital gain, on which you may be able to claim a capital gains tax discount. Currently, when you sell or otherwise dispose of an asset, you can reduce your capital gains by 50% if you have owned the asset for at least 12 months and are an Australian resident for tax purposes.
However, the specific facts of a situation usually dictate what options will be available – it is dependent on things like who holds the asset and how they came to acquire it.
In the next part, we will go through different examples to demonstrate the wide range of options that might be available.
In the meantime, if you have any questions, feel free to contact us.