With rising interest in cryptocurrency, advisers should be aware the Australian Taxation Office (ATO) is concerned that many taxpayers believe their crypto gains are tax free or only taxable when the holdings are cashed back into Australian dollars.
ATO data analysis showed a dramatic increase in trading since the beginning of 2020 and it was estimated that there are over 600,000 taxpayers that had invested in crypto-assets in recent years.
The ATO would write to around 100,000 taxpayers with cryptocurrency assets to explain their tax obligations and urge them to review their previously lodged returns.
Tim Loh, ATO assistant commissioner, said: “We also expect to prompt almost 300,000 taxpayers as they lodge their 2021 tax return to report their cryptocurrency capital gains or losses”.
Last year, the ATO directly contacted around 100,000 taxpayers who had traded in cryptocurrency and prompted 140,000 taxpayers at lodgement.
Loh said that gains from cryptocurrency were the same as other investments, such as shares, which meant buying or selling would be subject to capital gains tax (CGT). CGT would also apply to the disposal of non-fungible tokens (NFTs).
“We are alarmed that some taxpayers think that the anonymity of cryptocurrencies provides a licence to ignore their tax obligations,” Loh said.
“While it appears that cryptocurrency operates in an anonymous digital world, we closely track where it interacts with the real world through data from banks, financial institutions, and cryptocurrency online exchanges to follow the money back to the taxpayer.”
The ATO matched data from cryptocurrency designated service providers to individuals’ tax returns, helping them to ensure investors paid the right amount of tax.
“We know cryptocurrencies can be complicated – that’s why our focus is on helping people get it right,” Loh said.
“The best tip to nail your cryptocurrency gains and losses is to keep accurate records including dates of transactions, the value in Australian dollars at the time of the transactions, what the transactions were for, and who the other party was, even if it’s just their wallet address.”
Businesses or sole traders that were paid cryptocurrency for goods or services would have these payments taxed as income based on the value of the cryptocurrency in Australian dollars.
Holding a cryptocurrency for at least 12 months as an investment may mean the investor would be entitled to a CGT discount if they had made a capital gain.
In limited circumstances cryptocurrency may be considered a personal use asset.
“If you realise you’ve made a mistake and correct your return, we will significantly reduce penalties,” Loh said.
“However, failing to report on crypto-assets and not taking action when reminded will prompt penalties and potentially an audit.”