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Is Crypto Staking Taxed in Australia?

Is Crypto Staking Taxed in Australia?
Last Updated: September 29 2023

Is Crypto Staking Taxed in Australia?

Navigating the world of cryptocurrency can sometimes feel like deciphering a new language, especially with new concepts appearing regularly. One such concept that's been gaining a lot of interest is 'staking.' This process can provide a steady income stream for those in the crypto world, but it's crucial to understand its tax implications, especially for Australians. This article aims to clarify how crypto staking is taxed in Australia.

What is Staking?

In simple terms, 'staking' in the world of cryptocurrency is like a savings account. You put (or 'lock up') some of your crypto assets, and in return, you get rewards like earning interest. There are two key types of staking activities.

The first type involves helping to run and secure a special kind of blockchain known as a Proof-of-Stake (PoS) blockchain. Here, 'blockchain' is like a digital ledger that's stored across many computers. When a bunch of transactions need to be added to this ledger, the people who help do this (called 'validators') get paid fees from these transactions.

To become a validator, you need to lock up some of the blockchain platform's cryptocurrency, called a 'stake'. This stake acts like a security deposit, preventing any bad players from taking over the blockchain. If you don't have enough money or technical skills to become a validator, many PoS blockchains let you 'delegate' your stake to someone who does, and you still get to earn some passive income.

The second type of staking is locking up DeFi tokens on certain platforms to earn rewards. This process is often called farming. This kind of staking can offer higher 'interest rates' or 'yields' than the first type. However, these high yields can be boosted by the platform creating more tokens, which can decrease the token's price. So, while you're earning more tokens, the value of those tokens could be dropping. This is something to watch out for, as many investors have seen the value of their staked position fall significantly while chasing these high yields.

How can I stake my crypto?

Staking your cryptocurrency can range from a straightforward process to a more complex one, depending on your chosen approach. If you're keen on exploring staking, first, you'll need to decide on the asset you wish to stake, ensuring that it is stake-able. There are four main methods of staking to consider:

Staking Yourself by Setting Up a Validator: This method suits those interested in actively participating in validating the PoS blockchain they've decided to stake with. Though this might be more complicated, it could potentially yield slightly higher rewards than the other options.

Delegation Staking or Staking via a Staking Pool: This popular choice suits those who prefer to control their assets in a Web3 wallet and are comfortable delegating their assets or depositing them into DeFi staking pools.

Staking DeFi Tokens from a Web3 Wallet: This method involves DeFi staking or farming. Be aware that it carries higher risks, as the rewards often come from newly minted tokens, which can decrease the token's value as people sell them to collect the yield.

Staking on an Exchange: This option is best for those who prefer keeping their assets on an exchange, letting it handle the heavy lifting. However, keep in mind that only some exchanges offer staking, and these platforms generally charge a fee for this service.

So, what is crypto staking at its core? Simply put, it's a way to put your assets to work by locking them up, allowing you to earn a passive income from your investments. Although staking doesn't have to be complex, weighing all the risks before deciding if staking is the right path for you is important.

How is Crypto Staking Taxed in Australia?

In Australia, the Australian Tax Office (ATO) has clarified the tax implications of crypto staking. The process of staking, which might be thought of as earning interest on a bank deposit, involves locking up your crypto assets to support the operations of a blockchain network. Staking can earn you additional crypto tokens when the network forms a consensus, or it can potentially increase a token's value by limiting its supply.

Taxes on Staking Deposits

When it comes to the tax implications of staking deposits in Australia, it's crucial to understand the concept of capital gains. If you lock up or stake your crypto assets, you've not realised any capital gain or loss at that moment. Therefore, you're not liable for any tax at the time of staking.

However, once you decide to sell or exchange these staked crypto assets in the future, you might need to account for capital gains tax (CGT). The capital gain or loss is the difference between the cost base (the price you paid for the asset, plus associated costs like brokerage fees) and the proceeds you receive when you dispose of the asset.

Taxes on Staking Rewards

According to ATO guidelines, the rewards you earn from staking are considered ordinary income. This classification holds for various scenarios, including:

  1. When you participate in a staking pool and agree with the majority decision, earning rewards when the pool aligns with the consensus.
  2. When you vote-lock your tokens in delegated consensus mechanisms or proxy staking, the tokens received are counted as assessable income.
  3. When your tokens are locked into a smart contract or are otherwise untradeable, and earn you additional tokens.

There are situations where both income tax and capital gains tax come into play. For instance, suppose you staked 32 Ethereum using your own validator setup, and after a month, you receive a staking reward of 0.1 Ethereum worth $200. This should be reported as income to the ATO.

Later on, the value of that 0.1 Ethereum increases to $300, and you decide to sell. You've now made a capital gain of $100. In this situation, you've encountered income tax when you received the staking rewards and capital gains tax when you sold the staked reward tokens.

The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Cryptotaxcalculator disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.

Patrick has been in the crypto industry for the last 7 years and is passionate about sharing his knowledge and experience in web3. Patrick has also covered the crypto space for Forbes Advisor, Canstar and The Chainsaw.

Frequently asked questions:

01.Do you need to pay tax on crypto staking?

Yes, in many jurisdictions, including Australia, tax obligations do apply to cryptocurrency staking. Staking rewards are typically considered as income at the time they are received, so they need to be reported on your tax return. If you later sell, trade, or exchange the staked cryptocurrency, any capital gain or loss should also be reported.

02.Can you stake crypto in Australia?

Yes, you can stake cryptocurrency in Australia. It involves 'locking up' your cryptocurrency to support a blockchain network, and in return, you may earn additional cryptocurrency. You can stake through various methods such as running your own validator node, joining a staking pool, or using a cryptocurrency exchange that offers staking services.

03.Do you pay tax on crypto profit in Australia?

Yes, the Australian Tax Office (ATO) treats cryptocurrency as an asset and applies capital gains tax (CGT) rules to its disposal. This means that if you sell, trade or exchange your cryptocurrency for more than you paid for it, the profit is considered a capital gain and must be reported on your tax return. Similarly, if you make a loss, you may be able to claim it to reduce gains made on other assets.

04.Does the ATO know about my crypto investments?

The ATO has access to a vast amount of data from Australian exchanges and collaborates with other international tax entities, so likely already knows about your crypto investments. Therefore, it's important to maintain good records of all your cryptocurrency transactions for tax reporting purposes and to remain compliant when it comes to tax time.

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