Tax treatment of trader vs investor
The general rule is that investors usually purchase crypto for long-term growth, while traders actively trade crypto as part of their ordinary business.
When tax professionals talk about trader vs investor, they are referring to the purpose of your activity. An investor holds crypto for an investment purpose, whereas a trader holds crypto as trading stock as part of their ordinary business operations.
The classification of being a trader falls under a different section of Income Tax law in Australia, and as such has different tax implications to that of an investor. It’s important to understand the tax implications of being considered an investor or a trader so you can make informed decisions on your strategy and to ensure you meet your crypto tax obligations.
Tax treatment for crypto investors in Australia
As a crypto investor, your disposals of crypto are treated as capital gains and losses. You can calculate a capital gain on a sale by calculating the proceeds from the sale in AUD and subtracting the purchase cost along with any associated fees. The key tax implications for crypto investors are:
- A capital gain may be eligible for the CGT discount if it is held for more than 12 months.
- The CGT discount for individuals and trusts is 50%.
- A capital loss from crypto can be used to offset capital gains from crypto, shares, property or other sources.
- A capital loss can not be used to offset sources of ordinary income such as your salary.
- A capital loss can be carried forward indefinitely to future financial years until they are used.
- Capital gains tax can be optimised by selecting an optimal parcel matching method such as LTFO (Lowest Tax First Out).
Tax treatment for crypto traders in Australia
As a crypto trader, your crypto is considered trading stock that is used in the ordinary course of your business. Instead of calculating capital gains, a crypto trader must calculate purchases and sales of crypto, and determine the closing stock value of their crypto. The key tax implication for crypto traders are:
- There is no CGT discount available.
- Sales of crypto are ordinary income.
- Purchases of crypto are a deductible expense.
- The difference between closing stock and opening stock will be taxable income or a deductible expense.
- A net loss from a trading activity can be used to offset sources of ordinary income such as your salary, provided the non-commercial loss requirements are satisfied.
- Immediate deductions are available for expenses such as brokerage fees and eligible equipment purchases.
- Tax can be optimised by selecting an optimal closing stock valuation method.
Tax deductions available for crypto traders
Expenses that would normally be capitalised as an investor, are instead immediately tax deductible as a trader. Expenses that may be eligible for an immediate deduction are those that are incurred in your daily operations as a trader. These expenses may include:
- Brokerage fees.
- Subscriptions to magazines, newsletters and market reports.
- Subscriptions to data feeds, analytics and trading software.
- Equipment purchases (desktop PC, monitors and other hardware).
- Seminars, educational courses and coaching.
- Rent and internet.
Crypto investors can still claim these expenses, however they must instead capitalise the expense into the cost base of the asset, and will only realise the tax benefit when they later dispose the asset. In contrast, crypto traders get an immediate tax benefit from being able to claim the expense in the financial year it occurred.
Claiming a tax loss as a crypto trader
If you are operating a business of trading crypto and you incur a net trading loss, then you may be eligible to claim the loss against your other sources of income, provided you meet the non-commercial loss rules.
In practice, claiming a large tax loss will draw the attention of the ATO and can result in a review or audit process being undertaken. We recommend being confident in your tax position, and ensuring you have received tax advice from a professional on your situation and having them available to support you through the claim.
How to know if you are a trader for tax purposes
There is no set list of rules for who is and who isn’t a trader. A correct determination will consider your intent in undertaking the activity, and the objective facts of the activity. Even if you have determined that you are a trader, the ATO may disagree with your interpretation.
From our experience, the ATO takes into account a set of 20+ indicators to assess whether an individual is a trader or an investor for tax purposes.
The top three indicators for determining whether you are a crypto trader are:
Repetition, volume and regularity
This indicator considers the frequency of transactions, volume of purchases and sales, regularity of transactions, and the scale of the trading activity. Factors that indicate a trading activity include:
- placing trades regularly and consistently.
- regularly managing trading positions.
- invested significant capital or obtained a commercial loan for the crypto trading activity.
- trading with comparatively large amounts.
- spending the equivalent of a working week in activities related to their crypto trading.
On the more extreme end of a trader, would be someone who is operating an automated trading bot and taking advantage of small price movements in the market by placing 1,000s of trades per day.
Unlike a trader, an investor is someone who manages their portfolio a few times each year and places a small number of trades.
Sophistication of crypto trading operation
This indicator determines if the trading activity is run as a genuine business operation. Factors that indicate a more sophisticated trading activity are when the trader has:
- relevant qualifications and industry knowledge.
- registered an ABN.
- registered a business name.
- a business premises.
- equipment and charting software.
- a comprehensive trading setup used full-time for trading.
- been educating themselves and developing skills in finance and data.
- a business plan that is regularly reviewed.
Unlike a trader, an investor is often full-time employed in an unrelated field, and places trades with little research.
Trader documentation often includes having:
- business plan.
- trading strategy.
- trading journal.
- financial statements.
- comprehensive record keeping.
- tax invoices for expenses.
These documents are used to substantiate the business activities that are being conducted.
Although a crypto investor may have an investment strategy, they do not have a business plan for generating profit. An investor purchases crypto for long term growth and/or income yield.
Crypto traders will have a documented trading strategy, as well as a documented business plan. They prepare annual financial statements and regular reports for evaluating their performance.
Crypto traders have the primary tax benefit of being able to immediately deduct expenses and claiming losses against their other sources of income.
Crypto investors get the primary tax benefit of the 50% CGT discount.
Crypto tax calculator software for traders and investors
Regardless of whether you are an investor or trader, it’s important to have software for recording your transactions and calculating your tax outcomes. Crypto investors can use crypto tax calculator software such as Syla for calculating capital gains.
When evaluating whether crypto tax software is appropriate you should consider:
- Is the crypto tax software designed specifically for Australia?
- Are the correct tax outcomes achieved for investors?
- Is the software able to optimise for the lowest crypto tax in Australia?
Australian crypto investors can benefit from the LTFO tax optimisation available in Syla.
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