Introduction to Capital Gains Tax
‘Capital gain’ simply means the profit you make on a taxable capital asset. Taxable capital assets commonly held by individuals include shares, investment properties, collectables and in more recent times, cryptocurrencies such as bitcoin (BTC) and Ethereum’s ether (ETH).
Think of a taxable capital asset as something of value that you have purchased as in investment.
Capital Gains Tax (CGT)
CGT is the tax you must pay on any capital gain made upon the sale of the asset.
Imagine that you buy 1 BTC for $10,000 AUD. You’ve held it for 6 months and now BTC is worth $15,000. You decide to sell that 1 BTC.
To calculate your capital gain—or capital loss—you take the cost price ($10,000) and deduct it from the sale price ($15,000). This equals a capital gain of $5,000.
To encourage long-term investing, Australians are allowed to halve their capital gains tax rate when they sell a taxable capital asset at least 12 months after acquisition. This is called the ‘CGT discount’.
Using the same example as above, let’s change the number of months from 6 to 18. Now, you’d still make a capital gain of $5,000, but that amount would be halved because you’d be eligible for the CGT discount. Therefore, you’d add $2,500 to your taxable income.
Reporting Capital Gains & Losses in Australia
Where do you report capital gains and losses? Do you report it to the ATO after every sale? No, thankfully you only have to report this once a year to the ATO.
This reporting is done in your tax return at income item (label) 18. By far the most common CGT event happens as a result of selling a taxable capital asset. Other ways CGT events can be triggered include giving away a taxable capital asset.
It’s important to note, that if you are investing simply as a hobby rather than operating as a business (see below), any losses you make cannot offset your other income, such as salary.
Instead, if you make a capital loss for the year, you’re able to carry it forward and use it to offset any future capital gains.