Cryptocurrency – What are the Tax Implications?

Given the ATO is holding a magnifying glass over Cryptocurrency for tax returns in 2020-2021, Louise Cottee, client director at BridgePoint Group, provides a rundown on Crypto from a compliance perspective. 

According to a recent NEWS Corp article, one in four Australians will have invested in crypto currency this year. That means about 5 million people. It’s little surprise that Gen Y is leading the charge to Crypto. They make up over a third of the investors in Crypto currencies. Shunning traditional precious metal markets for the Crypto trading space. Social Media platforms are rife with commentary on crypto markets and there is also a plethora of advisers on YouTube predicting the next big, or little, swing. The lure is the market volatility which can see wild swings in Crypto currency values in a matter of hours. So instant gratification for GEN Y’ers is a driver in Crypto markets. No surprise in that. Where there may be a surprise is that wins are taxable. 

Cryptocurrency is on the ATO’s radar again this tax time. The ATO has warned taxpayers to ensure they keep records and report their cryptocurrency transactions.

The trading in cryptocurrencies has increased significantly in recent years with the ATO estimating that over 600,000 taxpayers have invested in cryptocurrencies in the last few years. Many taxpayers incorrectly assume that cryptocurrency is not subject to tax or because of the anonymity of the trading that the ATO will not be able to trace the transactions. However the ATO has been tracking cryptocurrencies using sophisticated data-matching since 2019. The ATO has indicated it will continue to focus on cryptocurrency again for 2021. The ATO data-matching information is not only used to identify cryptocurrency transactions for the current year but the data collected is also used to retrospectively trace taxpayers who have failed to report prior year transactions.

“This year, we will be writing to around 100,000 taxpayers with cryptocurrency assets explaining their tax obligations and urging them to review their previously lodged returns. We also expect to prompt almost 300,000 taxpayers as they lodge their 2021 tax return to report their cryptocurrency capital gains or losses.” Assistant Commissioner Tim Loh said. 

Crypto and the way it is taxed

The taxation of cryptocurrency can be complicated. The way it is taxed will depend on the nature of the transactions. Holding cryptocurrency as an investment can mean that disposals will be subject to capital gains tax (CGT). Disposals can include not only selling for currency but also gifting cryptocurrency or trading one cryptocurrency for another. Like other asset disposals, taxpayers may be eligible to access the CGT discount if the cryptocurrency is held for more than 12 months. Moving cryptocurrency from one digital “wallet” to another, where you maintain ownership, will not be considered a disposal for tax purposes.

Capital gains and also capital losses on cryptocurrencies should be reported in your tax return. Capital losses can be offset against capital gains (but not directly against your other income e.g. they cannot be deducted against salary and wages). However, any unused capital losses in the current year can be carried forward to offset against future capital gains. There is no time limit on how long you can carry forward these capital losses.

If you are carrying on a business of trading in cryptocurrency or using the currency in business transactions, the tax treatment will be different. There are a number of factors the ATO will look at to determine if you are in the business of trading cryptocurrencies. This is a complex area and advice should be sought. The tax implications of getting this wrong are significant.

Keep your records up to date

The key to getting the tax right is to keep detailed records of all transactions and speak to your adviser. If you need help for 2021 or if you have a prior year issue to resolve, then we would be happy to help.

Call BridgePoint Group on 1300 656 141 or email info@bridgepointgroup.com.au

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Regards

Louise Cottee