How to claim the personal use tax exemption for crypto
The personal use asset exemption is one of the few opportunities in Australia where you can legally pay no crypto tax. Achieving the personal use tax exemption can have a large impact on your tax outcome, but you must structure correctly to avoid scrutiny from the ATO.
The meaning of personal use crypto
Broadly, there are four categories to describe the purpose behind why people acquire crypto assets in Australia, each with differences in how tax is calculated:
Personal use is when you acquire crypto, such as bitcoin, that you will use to purchase items for personal use and enjoyment. Such purchases might include groceries, rent and entertainment, among many others. Importantly, you must have acquired the crypto for personal use, and the ATO takes the position that you must also dispose the crypto for personal use.
If you purchase crypto for personal use, but end up holding it for a period of time, then the longer it is held, the more likely it was actually acquired for an investment purpose.
A simple way to determine personal use
A quick starting point to give you an initial idea on whether you hold crypto for personal use is to ask yourself the following question:
Did I have an expectation that the crypto I purchased would go up in value?
If the answer is yes, then the purpose behind your purchase was most likely not for personal use, and it would instead fall into one of the other categories such as investment.
If the answer is no, then there is a chance that you may still be eligible for the personal use asset exemption.
Personal use tax exemption
The disposal of personal use assets is still subject to capital gains tax, unless the value of the personal use asset is less than $10,000 when it was originally purchased.
If you purchase a personal use asset for less than $10,000 and dispose of it for personal use, then any resulting capital gain or loss is exempt from capital gains tax. Otherwise, you will need to calculate and declare capital gains and losses on your disposals of crypto as normal.
It’s not all just good news for the personal use tax exemption. If you actually end up making a capital loss on your disposal, then being eligible for the personal use asset exemption means that you can’t claim the capital loss.
Achieving the personal use tax exemption
In practice, most Australian taxpayers are not eligible for the personal use tax exemption. This is because the majority of Australians are purchasing crypto for an investment purpose and they have the expectation that it will increase in value.
The ATO has provided their own guidance for when the personal use exemption can be relied upon, by way of an example:
Michael wants to attend a concert. The concert provider offers tickets with a discount on the price for payments made in crypto.
Michael pays $270 to buy crypto assets, which he then uses to pay for the tickets on the same day.
Under these circumstances, Michael acquires and uses the crypto assets in a short period of time to buy personal items. As such, the crypto assets are personal use assets.
This example may not be particularly exciting for Australian crypto users, but it does provide a definitive example from the ATO for when the personal use asset exemption would apply.
Regular purchasing of crypto for daily expenses
The ATO has also provided a second example that may be of more interest to Australian crypto users.
Josh pays $50 each fortnight to acquire crypto assets, all of which he uses in the same fortnight to buy computer games. He doesn't hold any other crypto assets.
In one fortnight, Josh sees a computer game for sale through an online retailer who doesn't accept crypto assets. Josh uses an online payment gateway that accepts crypto assets to buy the game.
Under the circumstances in which Josh acquires and uses the crypto assets, the crypto assets (including the amount he uses through the online payment gateway) are personal use assets. The one-off use of a payment gateway doesn't change the nature of his regular use of crypto assets.
In this example, Josh, is purchasing crypto regularly and holding the crypto for a period of not more than 14 days. He is then using that crypto to buy computer games for personal use. This example is more interesting as it gives some assurance that holding crypto for a period of up to two weeks can still be eligible.
The example also confirms that one-off purchases through a crypto-to-fiat payment gateway can still be eligible for the exemption, provided the majority of purchases are done directly with crypto.
Structuring for the crypto personal use tax exemption
If you intend on claiming the personal use asset exemption then we recommend taking the following best-practices steps, to ensure you have the best chance of remaining eligible for the personal use tax exemption.
Here’s a diagram of one possible structure that could help keep your personal use activity isolated and in good order. We’re going to explain it further as we go.
Dual investment and personal use
The main challenge with personal use comes from having crypto held for both investment and for personal use. While it’s possible to hold the same asset for two different purposes, it does necessitate having good record keeping and clear boundaries established between the two activities.
This means that one of the most important considerations when structuring for the personal use tax exemption, is simply in how to keep the two activities separate from each other. By achieving a clear separation, it will be easier to demonstrate which crypto you held for long-term investment purpose (not eligible for the personal use tax exemption) and crypto you briefly held that is eligible for the personal use asset exemption.
Purchase crypto from a separate exchange
If you already have a digital currency exchange that you use for purchasing and holding crypto for investment, then we recommend setting up a separate account specifically for the personal use activity.
By having separate exchange accounts, you can better isolate the personal use activity from your investment activity. If you use separate exchanges, then there is much less chance for you to accidentally co-mingle assets between the two activities.
The other benefit is a much clearer and simpler record of what occurred, which helps greatly when it comes to your end of year tax compliance.
Set up a separate personal use wallet
If you prefer self-custody of your assets, then we recommend establishing a separate wallet for all personal use transactions. Having a separate wallet for personal use has a number of benefits:
It keeps your personal use activity isolated from your long-term crypto investment activity.
Helps in identifying which crypto purchases and disposals are eligible for the personal use asset exemption.
Simplifies your own record keeping.
Makes it easier to apply the exemption in crypto tax calculator software such as Syla.
Topping up your personal use wallet
We recommend purchasing or earning crypto specifically for your personal use wallet. Avoid sending crypto that you held for investment to your personal use wallet.
Consider looking for an exchange or service where it is easy to set up an automated recurring purchase. This will allow you to keep the crypto balance in your personal use wallet topped up and ready for purchases without a lot of additional effort.
It’s important that the balance you keep in your personal use wallet should be appropriate for your everyday expenses. The amount can scale based on your spending habits.
Payments from your personal use wallet
Your personal use wallet needs to be used for regular purchases of goods and services that are private in nature, such as travel, food, and entertainment. To ensure eligibility to the exemption, you should spend the crypto within a short period of time. The ATO’s guidance indicates that 14 days is still considered a short enough time to remain eligible for the exemption. It’s possible that longer is still acceptable, but as it’s not clear cut, it would be considered high risk.
Based on the ATO guidance, there are also recommended ways to make purchases with your personal use crypto:
Exchanging the cryptocurrency directly for goods and services.
Using a merchant service that accepts crypto directly to make purchases.
Using a debit card with an automatic cryptocurrency to fiat option.
Using a BPAY service that allows you to pay bills using cryptocurrency.
The ATO considers that crypto exchanged directly for goods and services is more likely to be considered personal use. This means the majority of your purchases should be direct exchanges of crypto for goods and services, and not using a debit card or BPAY service that converts to fiat.
There may still be other very valid reasons for utilising a crypto debit card. Many crypto debit cards will provide rewards such as cashbacks on personal use purchases. In fact, many Australian consumers specifically choose debit cards to get the associated benefits on there personal use purchases. There are a number of crypto debit card issuers for Australian consumers such as CryptoSpend.
If you are able to rely on the personal use exemption then you are one of a fortunate few who are exempt from paying tax on those crypto disposals. However, it’s still very important to keep records.
Keeping records of your personal use expenses will help to substantiate your eligibility to the tax exemption in the event that the ATO undertakes a review or audit of your activity.
You should keep the following records for your personal use activity:
Crypto purchases and transfers.
Record each time you use your personal crypto, ideally a tax invoice of the transaction.
The recipient’s wallet details.
The on-chain transaction hash and address.
Store your records somewhere that will be safe for at least five years.
The more evidence you have the better if you are audited by the ATO.
Interpretative Decision ID 2002/795 Income Tax. Capital Gains: Personal use asset - floor tiles.
Section 118-10(3) of the Income Tax Assessment Act 1997.
Section 108-20(1) of the Income Tax Assessment Act 1997.
Favaro v. FC of T (1996) 34 ATR 1; 96 ATC 4975
The information in this article reflects our understanding of existing legislation, proposed legislation, rulings and other tax law, as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.
The information provided in this article is purely factual in nature and does not constitute tax advice, financial product advice or legal advice. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances. If you require professional advice that takes into account your particular circumstances, you should consult an appropriate professional.