The use of cryptocurrencies has continued to grow and so has the awareness of its increased use and value. Cryptocurrencies, like Bitcoin, are independent and not regulated by any central authority. However, in Australia, the ATO has already set up rules around the tax consequences of the various activities that you may be undertaking with the currency.
Cryptocurrency in the ATO spotlight
The ATO has specified that gains from cryptocurrency are an area of focus again this year.
The tax treatment of cryptocurrency depends on a range of factors, including whether the items are acquired with the intention of making a profit on sale or exchange in the short term or whether they are intended to be held for longer-term investment purposes.
It is also important to recognise that a taxing event can be triggered when one item of cryptocurrency is exchanged for another item. That is, even if no cash proceeds are received on disposal. The tax laws can be complex in this area and it’s important to ensure that you get the right advice.
Remember to keep records of your cryptocurrency exchanges. The ATO regularly runs data matching projects, and they have access to the data from many crypto platforms and banks.
Donations of cryptocurrency
In addition to their attention on cryptocurrency, the ATO has released some guidance on key issues to beware of when seeking to claim deductions for donating cryptocurrency assets to charities. The starting point in these cases is to confirm that the entity receiving the assets is endorsed as a deductible gift recipient (DGR) and to establish whether the not-for-profit organisation is set up to accept cryptocurrency assets.
As cryptocurrency is treated as a type of property for the purpose of the deduction rules for gifts this makes the process more complicated compared with situations where clients are making cash donations.
When considering whether you can claim a deduction for a donation of cryptocurrency assets, it is also important to recognise that the donation might trigger CGT implications. If you are transferring the assets to another party for no consideration, then the market value substitution rules will need to be considered in calculating the capital gain or loss on disposal.
Cryptocurrency data matching
It is not new that the ATO has their eyes on cryptocurrency. Starting in 2019, the ATO has been receiving data from Australian cryptocurrency designated service providers (DSPs) as part of a data-matching program to ensure that people trading in cryptocurrency are reporting transactions and paying the right amount of tax.
As part of this data matching program, taxpayers may be contacted and allowed to verify the information collected before any compliance action is undertaken. Taxpayers will be given at least 28 days to clarify any information that has been obtained from a data provider.
The ATO has been increasingly concerned with the risks posed by cryptocurrency use. Specifically, they are concerned that cryptocurrency could be used to move funds within the black economy, hide money offshore, and that taxpayers using cryptocurrency might have undeclared taxable capital gains.
Where errors relating to the tax treatment of cryptocurrency are identified we suggest that you may want to consider making a voluntary disclosure to the ATO. Penalties may be significantly reduced in circumstances where the ATO is contacted before an audit or other compliance action commencing.
Key points on how cryptocurrencies are taxed
- As of July 1, 2017, the government changed the definition of ‘money’ to include cryptocurrency for GST purposes. This is related to how GST was being triggered twice when using cryptocurrency for payment. Since this date, trades of cryptocurrency have been disregarded for GST purposes, unless the trade is for a payment of money or digital currency
- If you hold cryptocurrency for your personal use and you paid $10,000 or less to acquire the digital currency, then there is generally no tax impact when you dispose of the currency. However, if the cryptocurrency is not held for your personal use and enjoyment then some tax issues can arise.
- If your business accepts cryptocurrency as payment for goods or services, these payments are treated in the same way as any other. That is, if your business is registered for GST, the price paid by the person paying in the digital currency should include GST.
Key takeaways when using cryptocurrencies
- It is an unregulated environment that you are operating within, so do your research very thoroughly before you put your hard-earned dollars in this sector
- If you are looking to profit from trading Crypto, get advice on the tax consequences before you start
- Maintain good records of the transactions in a secure environment
- Get an external IT advisor to check all security measures you have in place for your computer network and home computer
- The ATO is monitoring this space very carefully and are likely to know if you have made a mistake in your tax treatment of cryptocurrency before you do, so let us know if you are investing in this sector
- If you are looking to accept Cryptocurrency as payment for your goods and services, get advice before you do. This so that you can reduce your risks wherever possible
