There are plenty of things taxpayers with recent losses need to be aware of before they complete their tax return. This year crypto investors and trader with big losses will be closely monitored by the Australian Tax Office (ATO) to make sure that they are making deductions that are a lawful, especially if they are individuals who purchased when it was at its peak towards the end of 2021.
On average, cryptocurrency stocks have lost close to 70 percent between the months of January 2022 and August 2022 as bitcoin and other digital currencies went from boom to bust in a wave of liquidations, withdrawal freezes, trading halts and bailouts.
It is estimated that around 8 percent of Australians who held crypto during the 2021-22 financial year have lost around $20 billion.
Investors who bought into CRYP, an ETF investing in up to 50 crypto leaders including Coinbase, Riot Blockchain and Microstrategy launched in late 2021, have seen their holding peak at around $12 before dropped to a trading price of below $2.50 in September 2022
According to analysis from Stockspot, investors who backed the ETF with a total of around $40 million on the first day of trading would crystallise $30 million in tax losses if they were sold.
It is important to be aware that an investors’ capital losses can be offset against any capital gains for that same income year or carried forward to offset future capital gains.
Because a capital loss generally is unable to be offset against income, it might take many years before investors can make use of these losses.
The ATO is warning it is tightening scrutiny of crypto to ensure users are accurately reporting gains and losses and to identify whether it is being used as an investment or for business purposes.
Furthermore, the ATO is also targeting users’ record-keeping to make sure that expenses claimed for crypto investing, such as software, commission, research or brokerage costs, are accurate.
Kevin He, chief executive of CloudTech Blockchain, which offers blockchain technology, is encouraging users to keep comprehensive records of gains and losses, the value in dollars at the time of transaction and the name of the counterparty.
It is also important to understand that people dabbling in crypto can be categorised into investors, speculators and traders and this means that they will all have different tax and reporting requirements.
Investors are generally referred to as “holders”, which means they buy their crypto intending it to generate wealth through capital growth. They typically hold their investments for several years and all gains and losses are offset against other capital gains and losses.
Speculators can be defined as individuals who are building wealth via buying and selling cryptocurrency over a short period of time. This can range from one-off transactions to multiple transactions throughout the year, with the main intention being to profit from each trade they make. However, because they don’t trade in business-like manner, their gains are treated as ordinary income and cannot be offset by capital losses. Losses may be able to be offset against other ordinary income such as wages or other investment income.
Traders invest in a business-like manner, with an intention to profit from their activities. Generally speaking, traders have a regular and systematic approach to the way they go about investing and will generally use additional software to help them spot arbitrage opportunities they can capitalise on. A trader will record the cost/value of their cryptocurrency held at the end of each financial year as trading stock of their business.
The ATO uses a range of measures to decide whether it is a legitimate business, such as assessing whether it has a commercial purpose with any prospects of making a profit. Gains and losses are treated as ordinary income. The cost/value of trading stock will be deductible to the business in the financial year of which it is sold.
