Transaction tax

Cryptocurrency and Taxes: Could You End Up Paying ATO More Than You Earned? | Cryptocurrencies

As tax season approaches in Australia, cryptocurrency investors have been warned to start calculating what they owe.

Some lessons can be learned from the recent US tax season, where some enthusiasts found themselves with a tax bill that exceeds their income after the recent crypto market crash.

Mark Chapman, director of tax communications for H&R Block, told Guardian Australia that the company expects thousands of clients to seek help with their crypto investments this year, adding that they tend to have at least least some knowledge of their tax obligations.

But he worries for those who might not be aware of what they owe before they find themselves in the crosshairs of the Australian Taxation Office.

“There are a lot of people who don’t have tax agents, who just don’t understand the tax implications at all,” he said. “They get into cryptocurrency trading and they don’t think about the tax implications, and they just don’t consider that they have to disclose anything on tax returns.

“Or there’s an even smaller group considering it but deciding not to include it anyway.”

Cryptocurrency is not taxed in the same way as interest earned on money in a bank account. For example, if you bought $100 worth of Bitcoin and its value increased to $500, you do not pay tax unless you cash it out, use it for a purchase, or exchange your Bitcoin for another cryptocurrency.

With the ATO indicating that it will be paying close attention to cryptocurrency assets this fiscal season, here’s what you need to know.

What tax do you have to pay on cryptocurrency profits?

If you withdraw your cryptocurrency to your regular bank account, you will have to pay capital gains tax (CGT) on the money you have earned. Any capital gain you realize will be added to your taxable income and taxed at your personal income tax rate.

You will also have to pay a tax when you exchange one cryptocurrency for another, use it to buy goods or services that are not for personal use, and give it as a gift.

You can use cryptocurrency to pay for personal use of goods or services up to $10,000, such as for vacations or a car. But Chapman warned that the ATO would look closely at these types of transactions to determine if the final purchase was the only reason to buy cryptocurrency.

Cryptocurrency transfers are taxed when they occur, so even if the currency has lost value, you will still have to pay tax on the amount exchanged or received.

If you are a cryptocurrency trader rather than an investor, there is a 50% capital gains tax reduction if you have held the investment for a year or more.

How do you determine what you should pay?

The ATO has a capital gains tax record keeping tool he advises people to use. You will need to keep track of how much you spent investing in cryptocurrencies and then what you earned when you sold it.

What about NFTs?

If you bought into the hype around non-fungible tokens, let it be a “bored monkey” or the The Australian Open alliance with the NFTsthese are also considered investments, and all profits are treated the same as cryptocurrency profits.

What if I don’t declare it?

If you don’t report your cryptocurrency profits, you could get in trouble with the tax office. The ATO has been collecting cryptocurrency transaction data and account information from designated service providers since tax year 2014-15 and its data matching operation continues this year.

According to the ATO site, “the data obtained will be used to identify buyers and sellers of crypto-assets and to quantify the associated transactions. We will match data provided by Designated Service Providers to ATO records to identify individuals who may not be complying with their registration, reporting, filing and/or payment obligations.

Isn’t there an easier way to do this?

Chapman said one question the federal government should consider as part of the Treasury’s review of the legal framework around cryptocurrency is whether its tax treatment is the right choice.

“At the moment, we are trying to fit cryptocurrency processing into an existing framework designed for other forms of assets,” he said.

“People who invest in cryptocurrency very often buy and sell quite frequently.”

Chapman said some clients would come with statements that include hundreds of lines documenting the buying and selling of crypto assets, and the capital gain must be calculated on each transaction.

“I really think our cryptocurrency tax laws probably need to be looked at, and maybe just refined.”