Millions of Australians are investing in cryptocurrencies, but many don’t understand the tax implications of their trades and profits.
The Australian Tax Office is looking closely at crypto trades and receives data feeds from crypto exchanges on individuals who have made crypto trades and profits and is sending reminders to taxpayers who haven’t declared their crypto profits on their tax returns.
Many Australians don’t understand the tax implications of their crypto trades. iStock
Accounting firm EY is seeing clients forget to declare their crypto earnings when it prepares their personal tax returns using its TaxChat app.
“We might have clients who use the TaxChat app who don’t feel the need to tell us about crypto and then we might be getting told by the tax office that said client actually has crypto investments,” says Jenni Nash, a partner at EY Australia.
“It’s getting more widespread as an investment and the tax office is savvy around picking up the appropriate reporting.”
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The EY TaxChat app is a tax preparation app that allows people to fill out their tax return online, ask questions of EY tax advisors as they go and then file the completed return to the ATO.
Research by YouGov last year found that about 4 million Australians were planning to purchase digital currencies in the next 12 months, including more than a third of Millennials, and one in five Australians have owned cryptocurrency at some point.
On the face of it, crypto is treated like any other investment by the ATO.
There are two different ways it can be taxed.
If someone is an active crypto trader, then any profits are taxed on the business account, that is as income. But if they are a buy-and-hold investor in crypto, then any profits are taxed as capital gains, and can attract the capital gains tax discount if they are held for 12 months or more.
However, there are some issues which can complicate its tax treatment, says Nash.
One of these issues is that it is a new investment class, so the reporting isn’t as robust it might be for share investing, where investors can receive a statement from their broker at tax time.
“It’s around how we get the information; how we collate the information and how we report that information to the tax office,” Nash says.
“It’s then up to the individual TaxChat user to make sure that they’ve retained the appropriate records for the cryptocurrency that they’ve traded.”
Another issue is that cryptocurrencies can morph or be swapped into other crypto-currencies and this creates a taxable event.
For instance, if someone buys $10,000 of one type of coin and this rises in value to $15,000 and then the cryptocurrency changes into another currency, this is a taxable event. While the taxpayer hasn’t sold any coins or realised their gains, the ATO treats it as if it has, so the taxpayer would be liable for tax on the $5000 gain.
“Anything that changes the original investment so that it is different, is arguably reportable. The fact that the investor is now on the fourth version of what might be considered the same investment, may require the four separate iterations to be reported as their own separately identifiable transaction,” says Nash.
“That’s the bit that catches people out. They might go, ‘But I invested $50,000 so my $50,000 is still $50,000.’ Arguably yes, but there might be four different points in time that we may now need to report on that particular investment.”
Jenni Nash, a partner at EY Australia EY
Nash says EY is finding a lot of clients aren’t reporting these trades because they don’t realise they can be taxable.
This underscores the importance of keeping records, and details of how their investments have changed, but this isn’t as easy as it is for more traditional investments.
“It’s been our experience that it’s not as easy to download that information. Where you’ve traded off the one platform it’s way easier, where it’s changed, it’s a lot harder,” she says.
Cryptocurrencies such as bitcoin, ethereum and tether are relatively new asset classes, so it’s important to get professional advice, Nash says.
Financial planner Frank Lin says more of his clients are going into crypto, allocating five to 10 per cent of their funds to the digital currencies.
Some clients with a range of assets can struggle at tax time because it can be hard to gather together all the necessary information, he says.
“If the investor is investing across 10 different assets, when it gets to tax time is usually the worst nightmare that they could possibly have,” says Lin, a financial planner at Xin Wealth in North Sydney.
“If anyone is intending to have different investment assets, it’s important to have a good accountant to solve that kind of tax issue. Otherwise, it is just very, very difficult for individuals to have good recordkeeping.”
