Amid the hype around cryptocurrency, a quarter of Australians now invest in crypto, according to financial comparisons company Finder.
Australia’s cryptocurrency exchanges have reported a similar level of enthusiasm to jump into the market. BTC Markets has said more Australians invest in cryptocurrencies like Bitcoin than precious metals like gold and silver, and a survey by US-based exchange Kraken suggests four million Australians planned to dive into the cryptocurrency market in 2021.
Tim Loh, ATO assistant commissioner, said in late May 2021 that the ATO was paying particular attention as a result of intense interest in crypto markets and the rush of new investors in the space since the start of that year.
However, with a lack of regulation for exchanges operating in Australia, experts say lack of expertise along with unclear guidelines by platforms may hamper people’s ability to navigate lodging their returns.
A spokesperson for the ATO said that the agency was focused on educating newcomers.
“Our main concern is that many taxpayers believe their cryptocurrency gains are tax-free or only taxable when the holdings are cashed back into Australian dollars,” the spokesperson said.
They said the agency expected to prompt almost 550,000 taxpayers as they lodge their 2021 tax return to report their cryptocurrency capital gains or losses.
New investors in the dark about tax requirements – and some tax agents may be too.
Mark Chapman, director of tax communications at H&R Block, said he believes many Australians blundered into the cryptocurrency space without considering the tax implications.
With the ATO setting up data-matching agreements with Australian data exchanges, giving it the ability to match data provided by the exchanges with the information on personal tax returns, Chapman said many Australians may be surprised their cryptocurrency holdings aren’t hidden from the Australian Government.
“There is no guarantee that your transactions in cryptocurrency will remain anonymous for long,” he said.
He also has concerns about the level of compliance tax agents might have around cryptocurrency.
“Whilst most tax agents are aware of the tax liabilities, they sometimes fail to ask their clients if they have bought and sold cryptocurrency,” Chapman said, leading to an “unwitting ‘code of silence'”.
Those holding cryptocurrency should be aware of the complexities when declaring
A spokesperson for the ATO said that many new to engaging with cryptocurrency were not aware they needed to record their activity on exchanges.
“We find that many investors are failing to keep good records when they buy, sell or trade cryptocurrencies, leading to errors or omissions on the tax return,” the spokesperson said.
Chapman said that apart from recognising cryptocurrency profits will be subject to capital gains tax (CGT) – with a potential 50% CGT discount if the person has owned the tokens for more than 12 months – they are also subject to income tax if they’ve traded cryptocurrency.
He advised that if the original cryptocurrency token amount acquired was less than $10,000 and it was bought “with a view to using it to purchase goods or services for your own consumption” (such as food, entertainment or other retail goods), any resulting gain from the disposal of the cryptocurrency will be CGT free, no matter how big the ultimate gain.
“If you intend to rely on this exemption, make sure you can demonstrate to the ATO that you genuinely intended to use the [cryptocurrency token] for personal consumption,” he said.
Chapman also highlighted the difference between trading and investing in cryptocurrency.
“The difference between a trader and an investor is that a trader normally buys and sells assets frequently with a view to short-terms profits, whilst an investor buys and holds an asset with a view to longer term growth,” he said.
He said that if someone has traded crypto in the past year, any profits made will be assessable income, so you’ll pay income tax on your net profits (the difference between the profits from your trading less any expenses incurred).
Cryptocurrency exchanges should not be the sole source of information
Chapman also warned that cryptocurrency platforms should not solely inform anyone’s decision-making around how to record and report on activity on exchanges.
“Tax advice provided by the platforms appears to be sketchy at best,” he said.
“Often along the lines of ‘these transactions may have tax consequences, speak to your tax adviser if you want to understand whether you are impacted’.”
Russell Wilson, founder and CEO of Australian cryptocurrency exchange CoinSpot, said the platform provides tax documents free of charge to its customers and said the platform was set up to make it simple for its users to report their tax.
“As CoinSpot has over one million Australians on our platform, we have an ongoing responsibility to ensure our customers can fulfil their tax obligations,” Wilson said.
“We always recommend that customers speak to a registered tax professional if they have any questions about their specific financial circumstances.”
The ATO spokesperson said that while “it appears that cryptocurrency operates in an anonymous digital world”, this is not the case.
“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.”