Cryptocurrency tax trap awaits sellers cashing out on pain

Bitcoin and other digital currencies have been dumped in recent months, down almost 70 per cent, and a fresh problem looms.

Don’t the financial gods think that the one million-plus Aussies who own cryptocurrency have suffered enough?

As the price of bitcoin wallows below $30,000 – down two-thirds from its record-high above$90,000 last November – another nasty hit is looming for some owners that could crush their spirits even further.

It’s called tax time, and many people who have sold cryptocurrency this financial year may not realise what’s coming their way.

A large chunk of crypto investors are younger people who haven’t had to deal with capital gains tax issues before, and accountants say many don’t even realise that crypto is taxable.

Like all investments, people must pay tax on any capital gains realised on the sale of their crypto assets.

While a 66 per cent fall has wiped out many recent gains, remember that bitcoin was trading near $13,000, rather than $30,000, just two years ago, and just $3000 five years ago. Thousands of other cryptos have had similarly spectacular rises, and falls.

So even if you’ve felt the pain of recent losses, there still may be a large overall profit on the sale. Capital gains get added to peoples’ taxable income – less a 50 per cent discount if held more than a year – and they pay their marginal tax rate on them.

Bitcoin has lost two-thirds of its value in seven months. Picture: Anthony Kwan/Getty Images

Buying and selling different digital currencies within the same trading account or digital wallet also creates a capital gain or loss event.

It’s estimated that the average crypto investment held by Aussies is $20,000, so we’re talking about some significant dollars and potential tax bills.

Chartered Accountants ANZ tax leader Michael Croker says those who have cashed out their crypto gains over the year – or sought to limit their losses – may face significant tax implications.

“Some have won big, and some have taken a bath in the volatile crypto market,” he says.

“Regardless of where you land on the wheel of fortune, or misfortune in some cases, cryptocurrencies are a taxable investment when you want to cash them out.”

NFTs, short for non-fungible tokens, are newer than cryptocurrencies and these digital assets – such as artworks and video files – could be treated under capital gains tax laws, Mr Croker says.

“More Chartered Accountants are hearing from clients dabbling in non-fungible tokens,” he says.

Crypto investors can’t run, and they can’t hide, from the ATO, which monitors purchases and sales using data provided by cryptocurrency exchanges.

KPMG tax partner Mardi Heinrich says: the ATO is increasingly turning its focus towards cryptocurrency gains”.

There may be a small loophole for crypto to be treated as a personal asset rather than an investment, but it would have to be bought then used quickly used to buy personal items.

“In most situations, cryptocurrency is not a personal use asset and will be subject to capital gains and the longer you hold cryptocurrency, the less likely the ATO considers it a personal use asset,” Ms Heinrich says.

Investors also should keep robust records of crypto transaction dates and values, she says, adding that the ATO has a handy Tax-smart tips document to help clear up confusion.

Anyone who’s selling their crypto assets for a loss should remember it’s treated like other assets, where losses can only be offset against capital gains to lower tax bills. They can’t be offset against wages or other taxable income.

Originally published as Cryptocurrency tax trap awaits sellers cashing out on pain