Q: Do you have to pay tax on crypto gambling winnings?
Overview
On 9 November 2023, the Australian Taxation Office (ATO) updated its non-binding web guidance on crypto prizes and winnings. For Australian tax purposes, gambling winnings are not usually taxable, but there can be complexity when it comes to gambling with crypto assets and similar tokens. Failing to carefully consider your activities may lead to a tax audit, which can attract further penalties and interest for not taking reasonable care.
This article outlines the current treatment of crypto prizes and winnings for Australian taxation law.
Gains and Losses Made on Gambling
It’s important to note that capital gains and losses directly resulting from winning or losing on crypto asset gambling or prizes in competitions are disregarded for CGT purposes. That is, the difference between the amount you contribute to gambling versus the winnings you receive will not amount to a capital gain or loss for CGT purposes.
For example, if you spend $100 on several raffle tickets and only win $50 worth of crypto assets, you disregard the $50 loss made.
Disposing of Crypto Assets to Gamble
Disposing of crypto assets for the purpose of betting and gambling will usually trigger a disposal event and CGT may be payable. However, as highlighted above, the difference between the amount you contribute to gambling versus the winnings you receive will not amount to a capital gain or loss for CGT purposes.
For example, if you spend $200 worth of crypto assets to participate in an online gambling platform and win $4000 worth of crypto assets, you disregard the $3,800 gain made. However, if you bought the original assets for $50 and disposed of them when they are worth $200 to bet, you have made a $150 capital gain.
Receiving Crypto Prizes and Gambling Winnings
The ATO clarifies that not all prizes or gambling winnings received in crypto assets will be treated as ordinary income. For example, prizes won in standard lotteries (such as lotto draws and raffles) and game shows (excluding regular appearance fees or gameshow winnings) are typically not ordinary income.
Disposing of Crypto Asset Winnings
Disposal as an Investor
If a person wins a crypto asset and holds it as an investment, any disposal of this asset may attract CGT. Whether the asset is a personal use asset, and exempt from CGT, depends on the fact and circumstances of holding. The ATO has published other guidance on crypto assets as personal use assets.
CGT Calculations
The cost base for CGT calculation is the market value of the crypto asset at the time it was won. Upon disposal, you will likely realise a capital gain or loss. For example, if you buy a crypto asset for $5,000, hold it for a time until it increases to $8,000 and use it for a wager – a capital gain of $3,000 is triggered.
Further, say you win crypto assets worth $20,000 and later sell them for $30,000, the capital gain would be $10,000. The increase from $8,000 to $20,000 is exempt as that portion is the gambling winnings.
Of course, if the crypto assets are held for more than 12 months, a CGT discount may apply, potentially reducing any capital gain. The 12 month discount is reset whenever crypto assets are disposed of and reacquired.
Exclusions and Considerations
The ATO’s guidance does not explicitly cover the personal use asset exemption in the context of crypto assets held for gambling activities. This exemption could apply under certain circumstances, making it a critical consideration for individuals involved in such activities. If you are looking at using crypto for gambling purposes and have unrealised capital gains, you should seek advice from a crypto tax professional.
Conclusion
This overview of the ATO’s stance on crypto asset prizes and gambling winnings underscores the complexity of tax law in the digital age. Crypto investors and traders must navigate these regulations carefully to ensure compliance, optimise their tax positions and not trigger an ATO audit.
This material is produced by Cadena Legal, an NSW registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here.
