Tax treatment of Cryptocurrency: What you need to know for EOFY

May 16, 2022

Over six hundred thousand Australians are now holding digital currency, and the ATO is implementing data matching to ensure appropriate reporting for tax purposes is being applied. The ATO’s treatment and regulation relating to cryptocurrency is constantly evolving, so it is critical to remain up to date by checking the ATO’s guidance on cryptocurrency tax.

Cryptocurrency is not recognised as a currency by the ATO, instead being treated as a capital gains tax (CGT) asset. A CGT event occurs when disposing of cryptocurrency. Disposing events include selling a cryptocurrency for a fiat currency, exchanging one cryptocurrency for another, gifting it, trading it, or using it to pay for good or services. Each cryptocurrency is a separate asset for CGT purposes, meaning when disposing of one cryptocurrency to acquire another, you are disposing of one CGT asset and acquiring another CGT asset. If cryptocurrency is disposed as part of a business, then the profit is assessable as income, not CGT. Payments made to a business or sole trader in the form of cryptocurrency are treated as income and valued in AUD.

Data matching and the ATO

Data matching is being used by the ATO to crack down on inaccurate reporting on cryptocurrency events. The data matching program has been in place since April 2019, with data on cryptocurrency transactions stretching back to the 2014-15 financial year. The ATO seeks data relating to cryptocurrency transactions and account information from DSPs (designated service providers). The data obtained will be used to identify buyers and sellers of cryptocurrency and quantify related transactions. Matching DSP data with ATO records allows the ATO to identify individuals who may not be meeting their registration, reporting, lodgement and/or payment obligations.

The objectives of the data matching program are:

  • To promote voluntary compliance
  • To identify and educate individuals and businesses who may be failing to meet registration or lodgement obligations
  • To develop and implement treatment strategies to improve voluntary compliance

The ATO will provide tailored messages in online services to prompt taxpayers to check they are correctly meeting their reporting obligations. After the return is lodged, any discrepancies that require verification are detected, and the ATO will contact the taxpayer. Taxpayers will be given opportunity to verify accuracy of information obtained by the ATO (and given 28 days to respond) before administrative action is taken on discrepancies.

Record keeping for Cryptocurrency transactions

It is critical to keep transaction records of all cryptocurrency transaction for five years after disposal. In addition:

When buying (acquiring) cryptocurrency, you need to keep records of either:

  • Receipts of transactions
  • Documents that display:
    • Cryptocurrency
    • Purchase price in AUD
    • Date and time of transaction
    • What the transaction was for

You will also need to keep records showing:

  • Commission or brokerage fees on purchase
  • Agent, accountant, and legal costs
  • Exchange records

When owning (holding) cryptocurrency, you need to keep records showing:

  • Software costs related to managing tax affair
  • Digital wallet records and keys
  • Documents showing date and quantity of cryptocurrency received via staking or airdrop

When disposing of cryptocurrency, you need to keep records of either:

  • Receipts of sale or transf
  • Documents that display:
    • Cryptocurrency
    • Sale or transfer price in AUD
    • Date and time of transaction
    • What the transaction was for

You will also need to keep records showing:

  • Commission or brokerage fees on the sale or transfer
  • Exchange records
  • Calculation of capital gain or loss

When exchanging cryptocurrency for goods, cash, or other cryptocurrencies, it is normally considered a disposal for the purpose of CGT and needs to be included as a capital gain or loss in your tax return. To work out capital gain or loss, determine the value of the cryptocurrency purchases and sales in AUD. The capital gain or loss is calculated by the difference between the cost base and capital proceeds from disposal of the cryptocurrency in AUD. The cost base is the cost of ownership, including purchase price plus certain other costs associated with acquiring, holding, and disposing of it. The capital proceeds are what you receive or the market value of what you receive when disposing of cryptocurrency. A net capital loss can be used to reduce a capital gain made later in the year; however, you cannot deduct a net capital loss from your other income.

Given the potential difficulties in calculating the capital gains and losses from multiple cryptocurrency transactions, there are various software solutions to help track and record transactions.

If you are dealing in cryptocurrency, contact us today to discuss your tax obligations.