The (ATO) Australian Tax Office has estimated that somewhere between 50,000 and one million Australians have currently invested in crypto related assets. Many of these individuals have failed, or will fail, to properly report the profits they have made for tax purposes. What will ATO do to tax cryptocurrency?

In response to this common occurrence, the ATO is gathering bulk records from Australian cryptocurrency designated service providers (DSPs) as part of a data matching program which aims to ensure that people trading in cryptocurrency are paying the amount of tax that is required for them to pay.

The data that has been provided to the ATO consists of cryptocurrency sales and purchase information. The data will identify Australian taxpayers who have failed to disclose their income details correctly.

A number of Australian taxpayers may find themselves being contacted by the ATO as a result of the data matching exercise. Those who are contacted will be given an opportunity to amend their tax returns to include any information highlighted by the ATO.

Individuals will have a timeframe of 28 days to clarify any information that has been obtained via the data provider. Thousands of letters have already been issued to taxpayers across the country and more will continue to be sent.

Recipients of the letters who fail to modify their tax return to include the missing transactions will be met with more forceful compliance action which could include a full tax audit.  

How the ATO Taxes Cryptocurrencies

Generally speaking, there is no income tax or GST implications if you are not in business or carrying on an enterprise and you simply pay for goods or services using cryptocurrency. An example of this would be purchasing personal goods or services on the internet with bitcoin.

Cryptocurrency is regarded as capital gains tax (CGT) assets therefore CGT potentially applies when an Australian resident sends a unit of the currency to another individual. Despite this, transactions are excused from the CGT if the cryptocurrency is used to pay for services or goods for personal use for example online hotel bookings, or at a café or restaurant which accepts bitcoins.

Transactions are also exempted from CGT if the cost of the cryptocurrency used to pay for the transaction is under $10,000 (this is the exemption for personal use assets). 

If the cost of the cryptocurrency used in a transaction surpasses $10,000, the personal use exemption will be unavailable and Capital Gains Tax will apply. The capital gain is calculated as the increase in value of the cryptocurrency between the time it was acquired and the time it was disposed of. 

An individual can easily lodge your tax return via MyTax, which is available VIA a taxpayers MyGov account. You can personalise your tax return and declare capital gains or losses by selecting the ‘Capital gains tax (CGT) related items’.

How Is Capital Gains Tax (CGT) Applied to Cryptocurrency

The way Capital Gains Tax (CGT) is calculated is based on the difference between the amount you paid for the cryptocurrency and the amount you disposed of in order to obtain it. Any profit you make is subjected to CGT, but this can be potentially reduced by 50 percent if you hold the cryptocurrency for over 12 months. 

Outline of How A Capital Gain Is Calculated:

  • Deduct the cost base from the sale proceeds – The cost base is the price you paid for the cryptocurrency in addition to any incidental costs.
  • The next step is to take away any capital losses.
  • You must than discount the gain – Individuals are eligible to receive a 50 percent discount if you hold the crypto asset for 12 months or more.
  • The resulting figure is your net capital gain – This is subject to tax at your marginal rate. The associated legal and professional costs to set up a sole trader business are minimal and the business has no separate legal existence from its owner, meaning you are responsible for all the liabilities of your business.
  • The disposal occurs when:
  • Selling cryptocurrency for Australian dollars
  • Exchanging one cryptocurrency for another
  • Gifting cryptocurrency
  • Trading cryptocurrency
  • Using cryptocurrency to pay for goods or services. In some cases (such as when you gift it), market value is substituted for proceeds.

It is important to keep in mind that CGT is not always relevant If you are acquiring the cryptocurrency in order to trade it, you might be deemed to be running a business of trading cryptocurrency. In this type of scenario, you will be required to pay income tax on the business profits. This is usually less advantageous than CGT because the 50% CGT discount cannot apply.

What Happens If an Individual Makes A Loss

If your cryptocurrency related sale proceeds are less than your cost base, then you will make a capital loss. A capital loss can be offset against capital gains arising in the same year and, to the extent they are not used up, they can be carried forward indefinitely until capital gains arise to absorb them. Capital losses can only be offset against capital gains, but not against any other form of income.

If you dispose of cryptocurrency during the year and net a capital gain, you might want to consider disposing of any other assets you own that are sitting at a loss. This way the capital loss can be offset against the capital gain. If you lose your coins, they are stolen or you are otherwise subject to fraud, you may be able to claim the value of your losses as a capital loss.