Tax Options for Bitcoin Losses

If you’ve made a loss on crypto, you might be wondering where that leaves you in regards to your tax position. Since Bitcoin was found by the AAT to not be a foreign currency, as we discussed in the first article of this series here, it is generally treated similarly to shares in this sense. 

For active traders: non-commercial loss rules may apply

If you are an active trader, you may be able to offset this loss against your other income. You generally can’t claim a loss for a business that is a hobby and unlikely to ever make a profit. The non-commercial loss rules determine whether you can in this case or have to defer the loss until you make a profit. 

To be able to offset this loss, you must satisfy two requirements. The first is the income requirement, which is met where the sum of the four elements for calculating your income is less than $250, 000. The elements are:

  • Taxable income, which is the assessable income minus your allowable deductions for a year.
  • Reportable fringe benefits, which is shown on a payment summary if it passes the threshold and takes part in this calculator.
  • Reportable super contributions which include your reportable employer super contributions and your personal deductive contributions.
  • Total net investment losses from 
    • Rental property investments such as negatively geared rental properties
    • Financial investments such as negatively geared share portfolios 

The second requirement is to pass at least one of the following four tests:

  • Your assessable income, made up from your ordinary income (such as gross earnings excluding GST) and statutory income (such as capital gains) from your business activities must be at least $20, 000 for the year. 
  • Your business has made a tax profit in three out of the five past years, which excludes any loss from that business that you had earlier deferred
  • You are using real property, which includes land, structures and interest in both, of at least $500, 000 in your business activity on a continuing basis. 
  • You use $100, 000 worth of ‘other assets’ in your business activity. This includes equipment, trading stock, items leased from another entity, and trademarks, patents and copyrights. This does not include real property or vehicles. 

If these two requirements are satisfied, then you may be able to offset your crypto losses against your income from other work. Otherwise, the loss would get parked to the side and you would only be able to claim it against your taxes if you later make profit off crypto.

For passive investors: capital loss rules may apply

If you have made a loss as a passive investor, capital loss rules will probably apply. This would mean you could deduct the loss you’ve made on crypto from your capital gains to reduce your capital gains tax. These must be used at first opportunity which means that if you’ve made a loss in the current year, you must use the loss to reduce any capital gains in the current year.

If your capital loss is greater than your capital gain, you could carry it forward and deduct it from capital gains in later years. There is no time limit for this. It is also important to note that a trading loss can be applied against capital gains but a capital loss can’t be applied against trading gains.

Conclusion:

Depending on whether you satisfy the non-commercial loss rules, your main two options are either to use the loss to offset your income or to use it to decrease your capital gains tax, with the option to park it if outweighs your capital gains.

If you have any questions or would like further assistance, please contact us.

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