Crypto trading – it starts with the usual distinction between investor versus trader.
Over the next three episodes let’s talk about how crypto actually works from blockchain technology over mining and proof of work, staking, rug pulls, how all this is taxed and what exactly the ATO can see when you trade crypto.
Today let’s start with crypto trading – including when you don’t actually trade but just get giving crypto – like a gift – so-called airdrops.
Harrison Dell of Cadena Legal in Sydney will walk you through the tax implications of crypto trading. Here is what we learned but please listen in as Harrison explains all this much better than we ever could.
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The usual distinction between capital, profit making scheme and business applies. Occasional trading makes you an investor on capital. CFDs for crpto would fall into the bucket of rofit making schemes. And trading large amounts on a frequent basis in a sophisticated business-like way would make you a trader.
Commercia Loss Provisions
The commercial loss provisions don’t really affect you as a trader since you easily pass the AUD 250,000 income threshold. Even if you have just AUD 10,000 – assuming you make no losses – you could exceed that threshold after 25 sell trades.
One big question unique to crypto trading are air drops. An Air drop is when a coin or token arrives in your wallet wihtout you doing anything. The ATO sees air drops of established crypto currency as ordinary income. Which is not great if it then looses its value.
So air drops create two taxing points. Ordinary income when you receive the airdropped coin at the market value of the coin – usually very low, often only a few cents. And this market value then also creates the cost base.
And then the capital gain when you sell the coin – usually a capital gain since your cost base (the market value at the time you received it) is so low.
The questio is, “What is an established currency?” Air drops are like a marketing initiative for new coins. The big established ones tend not to do air drops. So the fact that a coin does an air drop is basically an indicator that the coin is not established. If it was established, it wouldn’t do an air drop.
Another argument against treating airdrops as ordinary income is that – when you look at the definiton of ordinary income – ordinary income is when you do something. But most air drops arrive without you having done anything apart from opening a wallet.
Rug pulls are nefarious clauses in smart contracts that allow a staking pool to take your coins. When this happens, it is a capital or revenue loss like any other loss.
So these are just some tiny points from what we learned. There is a lot more in this episode. Please listen in as Harrison Dell goes into a lot more detail.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 28 February 2022