For the most part the Australian Taxation Office (ATO) has taken a good faith approach to the accounting of cryptocurrencies. This is unlikely to last long and anyone involved with cryptocurrencies should pay attention to the “tax side” before the ATO ramps up enforcement on undeclared crypto assets.
For the past year, the ATO has been gathering data from cryptocurrency exchanges. There has been an expectation the ATO would begin auditing cryptocurrency. The first signs of the ATO enforcing compliance came in March 2021, when an undisclosed number of letters were sent to taxpayers warning them to disclose their capital gains or losses.
Cryptocurrency and taxes
If you are looking to invest in cryptocurrency or have already invested, it is important to understand you will be taxed on the profits you earn.
For those who invested prior to the unprecedented rally of 2021 would have enjoyed some massive gains, drops and fluctuations in prices making cryptocurrency an appealing investment for new investors.
Below provides a guide to assist in making an informed decision if you decide to invest.
At the beginning of this year the ATO estimated approximately 500,000 to 1 million Australians owned cryptocurrency. If you are using an Australian cryptocurrency designated service provider (DSP), the ATO is already aware of your crypto transactions based on the information you provided when you signed up for an Australian exchange or wallet.
The ATO data-sharing program with Australian exchanges allows them to know when crypto owners buy, sell or earn interest from their crypto in a financial year. Therefore, it is essential for you to declare your investments and earnings in your tax return, failing to do so could result in penalties.
How it is taxed
Cryptocurrency is not considered money or foreign currency by the Australian Government; it is classed as an asset which attracts capital gains tax (CGT) and income tax. How you are taxed will vary based on your circumstances and intent. The ATO has different tax rules for individual investors and those receiving a regular income from trading.
If you are an individual the percentage of CGT you will pay will be the same as your income tax rate.
The majority of Australian cryptocurrency users fall into the individual investor category. Where an individual is investing in a future return, they buy and sell crypto as a personal investment aiming to build their wealth over a long period of time with profit made from long-term capital gains.
A trader is an individual who is active in cryptocurrency solely to generate an income and functions as a business. You are considered a trader if you earn income by running a crypto-trading exchange, forging or mining business, or regularly buy and sell for short term gains.
ATO Tax-smart tips for cryptocurrency investments
Want to know the ATO’s view, click here to see their 2022 Tax Time tips for cryptocurrency investments.
