ATO spotlight on compliance for traders in cryptocurrency

The Australian Taxation Office (ATO) is concerned that many taxpayers believe their cryptocurrency gains are tax-free or only taxable when the holdings are cashed back into Australian dollars. As an investor, if you buy, sell, swap cryptocurrency (crypto) for fiat currency (legal tender), or exchange one crypto for another, it will be subject to capital gains tax (CGT) and must be reported to the ATO.

‘Cryptocurrency’ means Bitcoin, or other crypto or digital currencies with similar characteristics to Bitcoin. Crypto generally operates independently of any central bank, central authority, or government.

The evolution in the creation, trade, and use of crypto is rapid and the ATO is alarmed about the number of taxpayers who think that the anonymity of crypto provides a licence to ignore their tax obligations. While it appears that crypto operates in an anonymous digital world, the ATO closely tracks where it interacts with the real world through data from banks, financial institutions, and cryptocurrency online exchanges to follow the money back to the taxpayer.

Last year, the ATO directly contacted around 100,000 taxpayers who had traded in crypto and prompted 140,000 taxpayers at lodgment. This year, the ATO will be writing to around 100,000 taxpayers with cryptocurrency assets to explain their tax obligations and urge them to review their previously lodged returns. The ATO is also expecting to prompt almost 300,000 taxpayers as they lodge their 2021 tax returns to report their crypto capital gains or losses.

Record keeping for cryptocurrency

It is vital to keep good records for all your transactions with cryptocurrency, whether you are using cryptocurrency as an investment, for personal use, or in business.

You need to keep the following records in relation to your cryptocurrency transactions:

• the date of the transactions
• the value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
• what the transaction was for and who the other party was (even if it’s just their cryptocurrency address).

The sorts of records you should keep include:

• receipts of purchase or transfer of cryptocurrency exchange records
• records of agent, accountant and legal costs
• digital wallet records and keys
• software costs related to managing your tax affairs

Businesses or sole traders that are paid cryptocurrency for goods or services will have these payments taxed as income based on the value of the cryptocurrency in Australian dollars.

Holding a cryptocurrency for at least 12 months as an investment may mean you are entitled to a CGT discount if you have made a capital gain. In limited circumstances, cryptocurrency may be accepted by the ATO as a personal use asset.

The ATO advised that when people have made a mistake and correct their return, it will significantly reduce penalties. However, failing to report on crypto-assets and not taking action when reminded will prompt penalties and potentially an audit.