Millions of Australians invest in cryptocurrency, but few understand the tax implications of their trades or profits.
The Australian Tax Office is closely monitoring crypto trades. It receives data feeds directly from crypto exchanges about individuals who have made cryptocurrency trades and profits. They also send reminders to taxpayers who haven’t declared their crypto profits in their tax returns.
Many Australians aren’t aware of the tax implications of crypto trades. iStock
EY, an accounting firm, finds clients forgetting to declare crypto earnings when it prepares personal tax returns using its TaxChat App.
Jenni Nash is a partner at EY Australia.
It’s becoming more popular as an investment, and the tax office knows how to pick up the correct reporting.”
The EY TaxChat App is a tax preparation tool that allows users to fill out their tax returns online and ask questions to EY tax advisors. After they are done, the return can be filed to the ATO.
YouGov’s research last year showed that approximately 4 million Australians planned to buy digital currencies within the next 12 months. More than a third of millennials plan to do so, and one in five Australians has owned cryptocurrency at one time.
Crypto is, on the surface, treated the same as any other investment by ATO.
It can be taxed in two ways.
Any profits earned by an active trader in crypto are subject to income tax. If they are crypto-investors, any profits will be taxed on the business account as income. Capital gains can also attract the capital gains discount if they are held longer than 12 months.
Nash says that there are still some problems that can make it difficult to tax.
One problem is that this is a new class of investment. As such, the reporting isn’t as robust as it might be for share investments. Investors can get a statement from their broker at tax.
Nash explains, “It’s about how we get the information, how we collect the information, and how we report it to the tax office.”
“It is then up to each TaxChat user that they ensure that they have the correct records for the cryptocurrency they’ve traded.”
Another problem is that cryptocurrencies could be transformed into or swapped with other crypto-currencies, creating a tax event.
If someone purchases $10,000 of a type of coin, and that value rises to $15,000, and then the cryptocurrency is converted into another currency, it’s a taxable event. The taxpayer may not have sold any coins or realized their gains, but the ATO considers it a taxable event and would be subject to tax on the $5000 income.
Any change to the original investment that makes it different is arguably reportable. According to Nash, an investor on the fourth iteration of the same asset may mean that each transaction must be separately identified.
That’s what catches people off guard. You might say, “But I invested $50,000, so my $50,000 is still $50,000.” However, there may be four points in time where we need to report on this particular investment.
Jenni Nash is a partner at EY Australia EY
Nash states that EY is discovering that many clients don’t report these trades as they don’t realize they could be taxable.
This highlights the importance of keeping records and details about how investments have changed. However, this is not as simple as traditional investments.
It’s not always easy to get that information, and this is our experience. She says that it’s much easier if you trade off one platform. But, if it’s changed, it’s much more difficult.”
Nash states that cryptocurrencies like bitcoin, Ethereum, and tether are still relatively new asset classes, and it’s essential to seek professional advice.
Frank Lin, a financial planner, says that more clients invest in crypto. He estimates that five to ten percent of his clients will allocate funds to digital currencies.
He says that clients who have a variety of assets may find it challenging to get all the information they need during tax time.
Lin, a North Sydney financial planner with Xin Wealth, says that tax time can be a nightmare if an investor invests across ten assets.
“Anyone who plans to invest in different assets should have a competent accountant to help them with tax issues. It isn’t very easy to keep good records if you don’t.