Question: Recently, I sold some cryptocurrency and because the market was down, I made a loss of $10,000. Is this something I’ll be able to deduct against my other income? I am currently only working part-time on a (pro-rated) annual salary of $18,000, but also have an investment portfolio of dividend-paying shares earning roughly $5,000 a year and in November 2022 I realised a capital gain of $67,000 when I sold an investment property.
Answer: For income tax purposes, investment income and any associated expenses are categorised in two ways: revenue and capital. Revenue items include things like business income and interest and dividend receipts, whereas capital items are those that are impacted by Capital Gains Tax rules and are typically larger, one-off transactions, like the sale of assets.
As identified in Greig v Commissioner of Taxation [2020] FCAFC 25 (2 March 2020), revenue/capital determinations can be fact-intensive and more information than what has been provided in your question is needed to ultimately confirm how your loss should be treated.
For example, we would need to identify whether or not you were carrying on a business of trading cryptocurrency – which would be a revenue item – or if you had purchased your cryptocurrency for investment purposes (even if you only held the coins for a short period of time), which would therefore be considered a capital item.
You also don’t specify whether or not the crypto was held in your name or through some form of an entity (like a company or trust) and so we’ll consider that the loss is personal to you as an individual.
If you were carrying out a crypto trading business as an individual, we need to consider how the non-commercial loss rules apply to your situation. Provided that you can satisfy the various tests, your loss may be offset against your other income, including your net capital gain.
If you can’t satisfy the loss tests, however, your loss will be quarantined until such time as you generate income from the same or a similar business undertaking. This means we would carry forward your loss into next year, at which point we would again evaluate your situation to determine whether or not your loss could be applied against your income.
Alternatively, if it turns out that your crypto transactions were part of an “isolated” or one-off profit-making venture unrelated to any business activity, your loss would be considered a revenue item and not subject to the non-commercial loss rules (as they only apply to business). If that’s the situation you’re in, you’re in luck because you will be able to deduct your loss against your income this financial year and won’t need to worry about carrying it forward.
If none of the above applies and your cryptocurrency disposal was in fact a capital event, standard Capital Gains Tax rules would apply. Your loss would be considered a capital loss and thusly only available to be offset against your gross capital gain. Using the numbers you’ve given us, that means your $67,000 capital gain would be reduced by your $10,000 cryptocurrency loss, bringing the gain down to $57,000 before any relevant CGT discount is applied.