Navigating the Crypto Tax Maze: Myth vs. Reality

The digital frontier of cryptocurrencies has reshaped the way we think about finance, assets, and investments. Along with this wave of innovation, however, comes a sea of misconceptions and myths, especially regarding the intersection of crypto and tax. With voices from all corners offering advice, it's easy to get lost in the noise. At Consensus Layer, we aim to clear the fog and separate fact from fiction. Join us as we debunk some of the crypto-tax myths we have encountered throughout our crypto journey.

Myth: “Crypto is anonymous so the ATO can’t see these transactions.”
Reality: While some cryptocurrencies offer more privacy than others, most major cryptocurrencies operate on public ledgers where transactions are visible. Even if the identities aren’t readily apparent, the ATO collaborates with Australian and global cryptocurrency exchanges. These exchanges may have reporting obligations to provide transaction and identity details so the ATO will know if you have had some form of crypto activity.

Myth: “There are no tax implications because I haven’t sold my crypto, NFTs etc. for AUD.”
Reality: The ATO considers the disposal of a cryptocurrency—whether selling it for AUD, trading it for another cryptocurrency, or using it to acquire goods or services—as a taxable event.

Myth: “When I do things with stablecoins, there are no tax implications because stablecoins are money.”
Reality: While stablecoins are designed to maintain a stable value by being pegged to a reserve like USD, the tax law doesn't recognise crypto assets as a “currency” but are instead considered a capital asset or trading stock. This means any disposal will require a gain/loss calculation.

Myth: "The value of my crypto, NFTs etc. have plummeted, so my tax bill should be minimal."
Reality: Your current asset value and the capital gains or losses you've already realised are two different things. Even if the value of your cryptocurrency or NFT has dropped, it doesn't retroactively change the capital gains you previously incurred. If you've already sold or traded a cryptocurrency or NFT at a profit earlier in the year, you owe tax on that profit, regardless of the current market value of your remaining assets.

Always remember, unrealised losses or drops in market value don't affect your tax obligations on previously realised gains. This is unless we’re talking about crypto assets in the context of trading stock. That is a whole other topic of tax law of which we won’t delve in here.

Myth: “I use crypto to buy personal things under $10,000 so my crypto should fall under the personal use asset exemption and there shouldn’t be any tax.”
Reality: There is a personal use asset exemption, but where the confusion arises is what a personal use asset is. Per the tax law, a personal use asset is

a CGT asset (except a * collectable) that is used or kept mainly for your (or your * associate's) personal use or enjoyment;

There are only some specific situations where the personal use asset might apply including but not limited to:

• Buying crypto tokens for gaming or gambling; these have been acquired to use for fun (generally speaking).
• You buy some crypto and load a crypto debit card with this to buy things with it in a short period of time. There is no clear guidance from the ATO on what this period could be but we imagine the time period to be a few weeks to a couple of months between the initial crypto deposit and buying something with it.
• You purchase crypto as a present for someone. Again, we imagine the period for the present to be transferred to be a relatively short time period of a few weeks to a few months.

 

Myth: "There are no tax consequences because I bridged ETH to another blockchain and it's the same asset."
Reality: Bridging assets between blockchains might seem like a straightforward process where the same asset simply transitions from one network to another. However, from the perspective of tax law, this can be seen as a disposal of one asset and an acquisition of another. It's essential to understand that, even if you consider it the same asset, the ATO might treat it differently.

For tax purposes, each transaction, even across blockchains, can potentially trigger a taxable event. When you move ETH to another blockchain, it's usually not just ETH anymore; it might become wETH, bETH, or another form of wrapped or pegged Ether, depending on the target blockchain. If there's a difference in value between the original asset and the new one, even momentarily, a capital gains event might be realised.

 Let's Bust Those Myths Together!

Cryptocurrency and tax can be a maze of misinformation. Don't let prevailing myths steer your financial decisions astray. Consensus Layer, Brisbane crypto tax specialists,  we're here to debunk those misconceptions and confidently guide you through the crypto-tax complexities. Lean on the expertise of David Fam and Leonard Jiang to ensure you're always on the right path.