Cryptocurrency and the Australian Taxation Office

Cryptocurrency and The Australian Tax Office: What you need to know.

  • Up to 1 million Australians own cryptocurreency, according to the ATO
  • Wages paid in cryptocurrency to employees are treated as taxable income
  • Gain on disposal of cryptocurrency is subject to Capital Gains Tax
  • ATO are actively conducting reviews and audits of taxpayers transacting in cryptocurrency
  • Detailed tax records must be kept for five years from date on which cryptocurrency was disposed

The Australian Taxation Office (ATO) estimates that up to 1 million Australians own cryptocurrency. This estimate is based on records collected by the ATO since 2015. Australian cryptocurrency exchanges, brokerages and payment facilitators are required by law to provide the ATO with the name, address, ABN, date of birth and contact details of people who have sold cryptocurrency through their facility. The ATO compares this information with disclosures made by taxpayers in their annual tax return and sends up to 350,000 letters to taxpayers each year reminding them of their tax obligations with respect to cryptocurrency.

The ATO, where it believes cryptocurrency activity may give rise to undeclared tax obligations, can also access linked bank accounts and associated wallets.  Should the ATO become aware of potentially undeclared cryptocurrency taxable gains, it may write to a taxpayer seeking specific details that enable a review or an audit to be conducted. Taxpayers have 28 days to respond to such a letter.

If you receive a letter seeking information, you have 28 days to respond. At this time, it is wise to fully comply with directions given by the ATO and provide a detailed reconciliation of any outstanding capital gains. This calculation should take into account relevant expenses and the cost base of all cryptocurrency transactions to enable the net capital gain to be calculated and assessed by the ATO. Enforcement penalties apply if full disclosure is not made in response to an ATO request for information.

Cryptocurrency – is it taxable?

If an employee is paid by way of cryptocurrency, it forms part of the employee’s taxable income and must be accounted for in the same way as if it was paid in Australian dollars. Accordingly, it is subject to personal income tax. If a business receives cryptocurrency as payment for goods or services, it too counts as ordinary income that is taxable. Market value of the cryptocurrency on the day the cryptocurrency is received is applied to determine the income amount. Where a business incurs business expenses that are paid for in cryptocurrency, these are tax deductible, based on the value of the acquired items and services received, as stipulated by the Australian Taxation Office.

Cryptocurrency and Capital Gains Tax

Cryptocurrency is not legal tender in Australia. This is why the ATO does not consider cryptocurrency as money or as a legitimate currency. Instead, cryptocurrency is viewed by the ATO as ‘property’. This means that it is a Capital Gains Tax (CGT) asset for tax purposes and any gain (or loss) on disposal of cryptocurrency is considered a CGT event.

Accordingly, taxpayers are obligated to declare any gain on the sale, exchange or gifting of cryptocurrency and pay tax on the net capital gain derived from the disposal. The rules are the same as for any other asset that is regarded as ‘property’ for purposes of the CGT legislation. The gain (or loss) on disposal must be calculated and reported in Australian dollars and based on the value of cryptocurrency from an identifiable online exchange. The gain or loss is calculated after allowing for transaction costs for which documentary evidence exists. The gain must be declared in your tax return and tax must be paid on the gain.

If the cryptocurrency has been held for longer than 12 months, then the 50 percent CGT discount applies for Individual taxpayers. The discount does not apply to Companies. Superannuation Funds are entitled to a 33.33 percent discount.

Should a capital loss on disposal arise, this amount can be offset to reduce a capital gain made in the current year or a subsequent year. A net capital loss can only be offset against a net capital gain, and not against other ordinary personal income.

Trader or Investor?

Most taxpayers with crypto tax obligations are classified by the ATO as Investors for tax purposes, which means the CGT provisions apply to income received. It is extremely rare for the ATO to classify a taxpayer transacting in cryptocurrency as a Trader.

To be classified as a Trader, a taxpayer must be dealing in cryptocurrency as a business in a commercially viable way. This implies conducting trading activities at scale, in a business-like manner and carrying stock in trade in line with a comprehensively documented business plan, supported by detailed accounting records. The advantage of being classified as a Trader is that substantial tax deductions are available and trading losses can be offset against ordinary income from any other source. This may substantially reduce a taxpayer’s assessable income.

What are my tax obligations regards cryptocurrency?

Irrespective whether a taxpayer is an Investor or a Trader, detailed tax records are essential and must be kept for five years after the date on which cryptocurrency was disposed. Records must include transaction date, Australian dollar value at the transaction date and details of the counterparty and the purpose of the transaction. The requirement is that sufficient records must be maintained to enable an accurate assessment of a taxpayer’s assessable income to be determined.

As cryptocurrency becomes increasingly popular, more apps and software solutions are likely to be made available by banks to assist taxpayers in meeting their statutory record-keeping requirements prescribed by the ATO.

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