Staking crypto gives you staking rewards which are treated as ordinary income for tax purposes.
Staking Crypto
It has become very popular to stake crypto. It gives you a regular income stream while you are waiting for your capital gains to grow. But it also comes with significant risk and a very unfavourable tax treatment. As Harrison Dell of Cadena Legal in Sydney will tell you in this episode.
Here is a very short overview of what we learned but please listen in as Harrison explains all this much better and in much greater detail.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Staking Crypto
Staking is lending your crypto to a network similar to the way you lend your money to a bank in your deposit account. Instead of interest you earn rewards.
The more you stake, the higher your staking power. Staking power is proportional to the percentage of total assets that have been staked.
Bitcoin doesn’t allow staking. Instead you can mine Bitcoin.
Proof of Stake Network
A Proof-of-Stake (PoS) network is the network that allows you to stake your crypto. A PoS network is different to the actual crypto currency.
In PoS networks, decision-making or computational power is directly linked to the number of assets held. So the more assets a network holds, the more power. So the more is staked, the more power.
Disadvantages of Staking
While your currency is staked, you have no control over it and can’t trade it during this vesting period. This only applies to the coins staked and not the entire wallet.
Rug Pull
In a rug pull the creator of the smart contract, ie staking contract, removes your coins from the contract. Think of it as theft.
Tax Treatment
Any reward for staking is ordinary income in the financial year you receive the reward. But the capital gain or loss is only determined when you sell.
So you could have the scenario where you receive a reward for staking worth let’s say $10,000. So you include $10,000 in your assessable income. But then the coin goes through a vertical fall and is worth zero and you have a capital loss. So you paid tax on something that in the end gave you no value.
ATO
The ATO can see your crypto trades in various ways.
1 – Data Sharing Arrangements
Data sharing arrangements with Australian exchanges tell the ATO what you trade but also what you might transfer overseas to international trading platforms
2 – AusTrac
Banks need to report transactions of $10k or over in their Threshold Transaction Reports (TTR) to Austrac.
3 – Common Reporting Standards
Australia is part of an OECD initiative to include crypto in the Common Reporting Standards, but at the moment the CRS don’t include crypto yet. So if you hold crypto in a low or zero tax jurisdiction, the ATO won’t receive information through CRS.
That’s all we got ready for you but there is so much more in this interview. Please make sure you listen to Harrison Dell since he has a wealth of helpful insights for you.
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