2021 has been the year of crypto and with hundreds of thousands of people buying and selling Bitcoin, Ethereum and other cryptocurrencies for the first time, the ATO has already announced that come tax time they’re going to be focusing squarely on your crypto gains.
Here are four things you need to consider as you start preparing your tax return for FY20/21.
1. Reporting capital gains when investing in cryptocurrency
In Australia, cryptocurrencies are essentially treated the same as shares. This means that every time you sell or otherwise dispose of your cryptocurrency, you trigger a “capital gains event” and have to tell the ATO about it. Your capital gain (or loss) is the difference between the value of the asset in Australian dollars when you purchased it and the value when you sold it or gave it away. Fortunately, simply buying and holding doesn’t have any capital gains effects.
But whereas shares are almost always being bought and sold for actual Australian dollars, in crypto it’s common for people to trade from one crypto to another to another without ever going back into fiat currency. For instance, if you use Australian dollars to buy Bitcoin, which you then use to buy Ethereum, which you later convert into USDC (a USD-pegged stablecoin), which you then use to buy Bitcoin again before finally selling back into Australian dollars, each and every one of those trades is its own capital gains event and needs to be reported to the ATO with exact timestamps and the value of the transaction in AUD.
And yes, just to be absolutely clear, trading to and from a stablecoin is still considered a capital gains event.
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2. Have I received any income from cryptocurrency?
There’s more to crypto than simply buying and selling coins. Over the course of the year you may also have received cryptocurrency in the form of staking rewards or airdropped tokens or forked coins or interest from locking tokens in a DeFi liquidity pool (the act of which is also, confusingly, a capital gains event).
In these cases, the ATO treats the cryptocurrency you receive as straight income, as if it was payment from an employer. You need to work out the value in Australian dollars at the time you came into possession of the cryptocurrency and report it as untaxed income on your tax return. If you then later sell the crypto for AUD or another cryptocurrency, it’s treated as a regular capital gains event.
3. How can I keep records of all my crypto transactions?
Things can all start getting pretty complicated pretty quickly in the crypto world. Trying to find out what the price of Ripple was in Australian dollars at 11:23 am AEST on September 4 2020 is not a great way to spend an afternoon.
Fortunately, there are a number of services that make it simple to keep your transaction records in order, such as Cointracker, Koinly and CryptoTaxCalculator. These services let you connect the exchanges and wallets that you use directly to your account, meaning that every transaction is automatically logged and registered in your currency of choice, which will likely be Australian dollars as it’s the only currency the ATO cares about.
At the end of the year, you can create and download reports that track your capital gains, income and inventory, ready to submit to your accountant or the ATO.
4. Will the ATO actually track me down?
Yes. Yes they will. Since at least 2019, the ATO has been collecting records directly from Australia’s cryptocurrency exchanges and matching them against people’s bank transactions and reported capital gains for the year. This year, the ATO expects to use that data to prompt 100,000 taxpayers to amend old tax returns and to alert 300,000 new entrants to the space as to their potential tax obligations.
The ATO is, however, promising to be lenient – as long as you do the right thing. According to Assistant Commissioner of Taxation, Tim Loh, “If you realise you’ve made a mistake and correct your return, we will significantly reduce penalties. However, failing to report on crypto-assets and not taking action when reminded will prompt penalties and potentially an audit.”
To make tax time a less stressful time you may stay on top of things, don’t overtrade (the long-term capital gains discount is a powerful thing) and be completely transparent in your return. After all, if you think keeping records of all your transactions is painful, just wait until you get audited.
Main image source: Andrey Aboltin/Shutterstock.com
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