Did you know that you have to pay tax on any profits you make on assets like shares and cryptocurrency?
If not, you might want to take a moment to consider the impact selling your shares or cryptocurrency will have when preparing your tax return at the end of the financial year.
If you hold cryptocurrency, it is even more imperative to understand capital gains tax (CGT) as the Australian Taxation Office (ATO) is focusing on cryptocurrency this financial year. The ATO will use their powers to acquire account and transaction history data from an estimated 400,000 to 600,000 individuals this financial year. This means that your cryptocurrency transactions will not ‘fly under the radar’ and you need to appropriately disclose the transactions on your tax return.
CGT can be triggered when a person disposes of an asset. A disposal of a share or cryptocurrency can occur in the following circumstances:
- sale or gift – whether to a third party or to a relative, friend or associate;
- trade or exchange asset to another form of cryptocurrency or another managed fund;
- convert cryptocurrency to Australian dollars, or
- use cryptocurrency to obtain goods or services.
If you dispose of a share or cryptocurrency, you are liable for tax on the capital gain you have made. Capital gain or loss is calculated by finding the difference between the cost base and the price you sold the asset for (or its value at that time).
The cost base is generally the price paid for the share or cryptocurrency including any brokerage or stamp duty fees. If the difference between the cost base and sale price is positive, you will have made a capital gain. The ‘sale price’ is generally the market value of the share or cryptocurrency at the time it is sold, gifted, transferred, exchanged or converted.
Many people believe that CGT is a separate tax on assets. In reality, the capital gains you make are added to your ordinary income to form your assessable income, which is taxed at your marginal tax rate.
Mary earned $40,000 in wages from her employer from 1 July 2019 to 30 June 2020. This income alone puts Mary in the 19% tax bracket.
However, Mary purchased 1,000 shares / coins for $60 on 1 August 2019 and sold the shares / coins for $80 on 1 April 2020. She has made a capital gain of $20,000 during the financial year.
This capital gain is added to Mary’s wages to increase her assessable income for the year to $60,000. Mary will start paying tax on that gain at 19%, and in fact, will be liable to pay tax at 32.5% on part of the gain.
If the difference between the cost base and the sale price of a share or cryptocurrency is negative, you will have made a capital loss.
A capital loss can also arise for shares / coins if an administrator or liquidator of the company you own shares in declares that the shares / coins are worthless. This will become a capital loss of the full amount you purchased the shares / coins for, including any brokerage or stamp duty.
A capital loss can be beneficial because it can be used to offset a capital gain to reduce the amount of CGT you are required to pay. If you have not made any capital gains in the financial year, this loss can also be carried forward to offset capital gains in future financial years. However, you cannot use a capital loss to reduce your other assessable income.
In the example above, Mary also purchased $10,000 worth of EFG stock. During the financial year, EFG became insolvent and Mary’s shares were declared worthless. This will be a capital loss of $10,000.
Mary also sold XYZ shares for $5000 less than what she purchased them for.
Mary’s capital losses of $10,000 and $5,000 can be deducted from her capital gain of $20,000 to create a net capital gain of $5,000. As a result, her taxable income for the year would be $45,000, putting Mary in the $18,201 – $45,000 marginal tax bracket
CGT DISCOUNT FOR INDIVIDUALS
An individual can receive a 50% discount on capital gains for assets held for over 12 months. This discount is applied after any capital losses have been deducted from the capital gains.
This discount can provide a substantial reduction for people who have made significant profits on their stocks and cryptocurrency due to the large fluctuations in prices over the last year.
Suppose Mary had purchased the 1,000 shares / coins for $60 each on 1 April 2018 instead of 1 August 2019. As Mary would have held the shares / coins for over 12 months, she can apply a 50% discount to the $5,000 net capital gain she made after capital losses have been deducted.
Mary’s capital gain will be reduced to $2,500 and her assessable income would be $42,500. Mary’s taxable gain would be taxed at 19%.
CRYPTOCURRENCY EXEMPTION FROM CGT FOR PERSONAL USE
Cryptocurrency transactions will be exempt from CGT if the coins are used to purchase goods or services for personal use and the cryptocurrency is a personal use asset that was purchased for less than $10,000. For this exemption to apply, the vendor must accept cryptocurrency as a form of payment for the goods or services.
In order to be a personal use asset, the cryptocurrency must not be held as an investment or as part of a profit-making scheme. The cryptocurrency must only be held for personal use and enjoyment rather than as an investment. This means that the cryptocurrency must be held in the same way that you hold cash at a bank - not to make a profit but rather for your personal use and enjoyment.
The ATO view is that the longer you hold a cryptocurrency for, the less likely it is to be considered a personal use asset.
WHICH SHARES OR CRYPTOCURRENCY ARE YOU DISPOSING OF?
A problem arises when you purchase multiple parcels of the same share or cryptocurrency at different times and prices. Each parcel is viewed as an individual CGT asset by the ATO.
Suppose Peter purchased 500 shares / coins on 1 April 2019 for $60, 500 shares / coins on 1 May 2019 for $65 and 500 shares / coins on 1 June 2019 for $70
These shares are not registered by the ASX as three parcels of ABC shares but rather one group of 1,500 shares. However, the ATO views these three parcels as separate CGT assets.
If Peter sold 500 shares on 1 April 2020, which shares did he sell?
This becomes a problem for two reasons. Firstly, the investor needs to be able to identify the cost base of the shares or cryptocurrency that are sold in order to calculate whether they have made a capital gain or loss.
The second problem is that the investor needs to be able to identify the specific shares that were sold in order to determine whether they held the shares for 12 months and can apply the 50% discount.
An investor has two options when dealing with unidentifiable shares of the same company and type.
OPTION 1: SPECIFICALLY DECIDE WHICH SHARES ARE DISPOSED OF
In this scenario, the investor can specifically elect which shares from which specific parcel they wish to dispose of. This method requires the investor to keep detailed records with clear evidence of the shares the investor intended to dispose of at each sale.
Peter wants to sell 500 shares / coins. Peter elects to sell 250 shares / coins purchased on 1 April 2019 for $60 and 250 shares / coins purchased on 1 May 2019 for $65.
Peter must keep a detailed record of this sale and outline how many shares / coins are remaining from each parcel.
OPTION 2: FIRST IN FIRST OUT
If you do not have detailed records of the shares that were sold, the ATO has accepted the use of the first-in-first-out (FIFO) presumption as a method of determining which shares were disposed of. This means that the first shares purchased will be the first shares to be sold. This gives the investor less control over the CGT implications of selling specific shares.
Peter wants to sell 500 shares. FIFO means that the 500 shares purchased on 1 April 2019 will be sold first.
WHAT OPTION TO CHOOSE?
The investor can only choose one option for each stock. This option would likely be the one that provides the most optimal tax advantage to the investor. FIFO is usually a beneficial option for investors because selling the first parcels purchased first makes it more likely that the investor can satisfy the 12 months 50% deduction requirement. Alternatively, specifically electing when stocks are disposed of allows the investor more control over the CGT implications. For example, they may elect to sell newer parcels with smaller gains if the investor is in a high marginal tax bracket.
This article provides a broad overview of the implications of CGT on shares and cryptocurrency. Please contact your tax professional for tailored advice to your personal circumstances.
HOW CAN WE HELP?
McInnes Wilson Lawyers can:
- help you to determine whether a sale, transfer or disposal of shares or cryptocurrency is likely to trigger CGT consequences;
- help you to determine how much CGT you will be taxed upon at the end of the financial year; and
- help you to determine the most tax-effective method for disposing of the same type of shares or cryptocurrency.