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With the dramatic increase of cryptocurrency trading since 2020, it’s no surprise that the Tax Office want to get their hands on the tax from the gains generated from this trading.
The Tax Office has implemented a cryptocurrency data-matching program, which will scrutinise cryptocurrency transactions and account information from designated service providers until the end of the 2023 financial year. It is expected that records relating to 400,000 to 600,000 individuals will be obtained each year under the program.
The data obtained identifies the buyers and sellers of crypto assets and will include identification details including names, addresses and phone numbers as well as transaction details such as bank accounts, transaction dates and coin type. The collection of this data is designed to uncover individuals who have failed to report a disposal of cryptocurrency and the appropriate gain or loss in their income tax return.
The Tax Office is also writing to approximately 100,000 taxpayers with cryptocurrency assets, explaining their tax obligations and urging them to review their previously lodged returns.
The Tax Office expects approximately 300,000 taxpayers to report their cryptocurrency gains or losses in their 2021 tax return.
I’ve been investing in Cryptocurrency, now what?
Generally if you buy, sell, swap for fiat currency, or exchange one cryptocurrency for another, it will be subject to Capital Gains Tax (CGT). This is irrespective of whether you see yourself as an investor, trader or just using crypto currency as another form of currency to buy or sell goods or services
CGT Capital Gains Tax also applies to the disposal of Non-Fungible Tokens (NFTs) – a unit of data stored on a digital ledger, called a blockchain, which certifies a digital asset to be unique and therefore not interchangeable. Non-Fungible Tokens can be used to represent items such as photos, videos, audio, and other types of digital files.
If you realise you’ve made a mistake and have not reported all of your cryptocurrency gains and losses you should amend your income tax return to include them. This may significantly reduce the penalties imposed than will be imposed if the Tax Office amend your income tax return during an audit.
If you transact or have transacted with cryptocurrencies in the past, it is important to keep a good record of all your transactions and to include all gains and losses in your income tax return.
What record keeping is required?
You need to keep records of the following in your transactions:
- Date of transaction
- Value in Australian Dollars (even if the transaction is a transfer from one cryptocurrency to another cryptocurrency)
- Purpose of transaction and to whom
- Receipts of any purchases and transfers
- Records of Agent, accountant and legal costs
- Software costs in managing your tax affairs
You should start keeping these records now and not just when you sell, trade or swap cryptocurrencies as it is important to track the costs of the cryptocurrencies to ensure that your tax liability can be minimised.
Capital Gains Tax and Cryptocurrency
A Capital Gains Tax event occurs when you buy, sell, swap for flat currency, or exchange one cryptocurrency for another dispose of your cryptocurrency. In addition gifting or using cryptocurrency for goods or services would be considered a Capital Gains Tax event.
The Tax Office matches data from cryptocurrency designated service providers to individual’s tax returns, to ensure investors are paying the right amount of tax.
Businesses or sole traders that are paid cryptocurrency for goods or services, will have these payments taxed as income based on the value of the cryptocurrency in Australian dollars.
If you held your cryptocurrency for at least 12 months and have made a gain on that cryptocurrency you may be entitled to the general Capital Gains Tax discount. In limited circumstances cryptocurrency may be considered a personal use asset.
Case Study
A Client who had been trading in Cryptocurrency for many years, hadn’t given much thought to the implications on taxes of cryptocurrency.
Jump to 2020 end of financial year and Client receives a letter from the Tax Office, requesting that he report capital gain or loss on his tax returns.
The letter he received states that the Tax Office received information of disposed cryptocurrency and that disposal of cryptocurrency for goods, cash or other cryptocurrencies are considered as disposal for the purposes of capital gains tax. In this case, the letter has also requested for the client to include a capital gain or loss in their income tax return.
The letter further states that if the client gets audited in the future and capital gains tax was not reported correctly, heavy penalties will apply.
As the client had purchased cryptocurrency to be under his company, he reported it on his company tax return that year.
However, since he had signed up for crypto-trading at a time where the exchange had only allowed investors to be registered in the individual’s name, a notice of cryptocurrency transaction popped up again in his personal name when completing his individual tax return.
To resolve this situation, a declaration of trust had to be submitted, noting that the trading was for the company, and not for the individual.
With increased data-matching capabilities, not reporting or attempting to report less than required on any cryptocurrency activity you’ve engaged in as an individual or business to the ATO, is certain to be detected.
If you have any concerns regarding your cryptocurrency reporting obligations, please contact one of the friendly team members at CIB Accountants & Advisers.
