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Introduction
The Australian Taxation Office (ATO) recently updated its non-binding web guidance concerning crypto prizes and winnings on November 9, 2023.
While conventional gambling winnings aren’t typically taxable in Australia, dealing with crypto assets in gambling scenarios can introduce complexities.
Failing to carefully consider these activities may invite tax audits, leading to penalties and interest for negligence.
This article aims to elucidate the current treatment of crypto prizes and winnings according to Australian taxation law.
Gains and Losses from Gambling
In the realm of crypto asset gambling or prize competitions, any capital gains or losses directly resulting from these activities are disregarded for Capital Gains Tax (CGT) purposes.
This means that the difference between the amount contributed to gambling and the winnings received doesn’t lead to a capital gain or loss for CGT purposes.
For instance, if an individual spends $1000 on lottery tickets and wins $500 worth of crypto assets, the $500 loss incurred is disregarded for tax purposes.
Disposing Crypto Assets for Gambling
When disposing of crypto assets for gambling purposes, it typically triggers a disposal event, potentially subjecting it to CGT.
However, similar to the previous scenario, the difference between gambling contributions and winnings doesn’t affect CGT outcomes.
For instance, if $5,000 worth of crypto assets are used for online gambling, resulting in $10,000 of winnings, the $5,000 gain is disregarded.
Yet, if the initial assets were purchased for $500 and disposed of at $5,000 for betting, a $4,500 capital gain is realized.
Treatment of Crypto Prizes and Winnings
Not all prizes or gambling winnings received in crypto assets are considered ordinary income, according to the ATO.
For example, prizes from standard lotteries, raffles, and game shows (excluding regular appearance fees or game show winnings) are typically exempt from being treated as ordinary income.
Disposal as an Investor
If an individual wins a crypto asset and holds it as an investment, disposing of this asset may attract CGT.
Whether the asset is considered a personal use asset, exempt from CGT, depends on specific factors outlined in ATO guidance on crypto assets as personal use assets.
CGT Calculations
The cost base for CGT calculation is determined by the market value of the won crypto asset.
Upon disposal, a capital gain or loss is typically realised.
For instance, buying an asset for $5,000, seeing it rise to $10,000, then using it for gambling triggers a $5,000 capital gain.
Additionally, if crypto assets worth $50,000 are won and later sold for $75,000, a $25,000 capital gain is realized.
However, the portion increasing from $40,000 difference between the stake and the winnings remains exempt as gambling winnings.
Exclusions and Considerations
ATO guidance doesn’t explicitly cover the personal use asset exemption for crypto assets used in gambling activities.
This exemption could potentially apply under certain circumstances, emphasizing its importance for individuals involved in such activities.
Seeking advice from a crypto tax professional is advisable for individuals considering using crypto for gambling purposes, especially those with unrealised capital gains.
Conclusion
Understanding the ATO’s stance on crypto asset prizes and gambling winnings highlights the complexities of tax regulations in the digital era.
Crypto investors and traders must navigate these rules meticulously to ensure compliance, optimize tax positions, and mitigate the risk of an ATO audit.
Get more of the latest crypto tax advice from Crypto Tax Degens.