Cryptocurrency and Taxes: Could You End Up Paying the ATO More Than You Earned?

As tax time approaches in Australia, cryptocurrency investors have been warned to work out what they owe.

There are some lessons to be learned from the recent tax season in the US, where some enthusiasts have a tax bill that exceeded their income after the recent crypto market crash

Mark Chapman, director of tax communications for H&R Block, told Guardian Australia that this year the company expected thousands of clients seeking help with their crypto investments, adding that they tended to have at least some knowledge of their tax obligations.

But he worries about those who may not be aware of what they owe before they come in the crosshairs of the Australian tax office.

“There are quite a few people, who don’t have tax advisors, who just don’t understand the tax implications at all,” he said. “They start trading cryptocurrency and they don’t think about the tax implications, and they just don’t feel like they should release anything on the tax return.

“Or there is an even smaller group that is considering it, but decides not to include it.”

Cryptocurrency is not taxed in the same way as interest earned on money in a bank account. For example, if you bought $100 worth of Bitcoin and it has increased in value to $500, you won’t pay tax on it unless you cash it out, use it for a purchase, or exchange Bitcoin for another cryptocurrency.

With the ATO indicating that it will pay a lot of attention to cryptocurrency assets this tax season, here’s what you need to know.

What Tax Do You Have to Pay on Cryptocurrency Profits?

If you deposit your cryptocurrency back into your regular bank account, you will be required to pay capital gains tax (CGT) on the money you have earned. Any capital gains you make are added to your taxable income and taxed at your individual income tax rate.

You also have to pay taxes when you exchange one cryptocurrency for another, use it to purchase goods or services that are not for personal use, and when you give it away as a gift.

You can use cryptocurrency to pay for personal use of goods or services up to $10,000, such as for a vacation or a car. But Chapman warned that the ATO would closely examine these types of transactions to determine if the final purchase was the sole reason to buy cryptocurrency.

Cryptocurrency transfers are taxed as they occur, so even if the currency has depreciated, you will owe tax on the amount exchanged or paid out.

If you are a cryptocurrency trader rather than an investor, there is a 50% discount on capital gains tax if you hold the investment for a year or more.

How do you find out what to pay?

The ATO has a Capital Gains Tax Tracking Tool it advises people to use. You need to keep track of how much you invested in the cryptocurrencies and then what you earned when you sold them.

What about NFTs?

If you’ve bought into the hype surrounding non-fungible tokens, be it a “bored monkey” or the The Australian Open free-range with NFTsthose too are considered investments and any gains are treated in the same way as cryptocurrency gains.

What if I don’t report it?

If you don’t declare your cryptocurrency winnings, you could be in trouble with the tax authorities. The ATO has been collecting data on cryptocurrency transactions and account information from designated service providers since the 2014-15 tax year, and the data reconciliation will continue this year.

According to the ATO website, “The data obtained will be used to identify the buyers and sellers of crypto assets and quantify the related transactions. We will match data provided by designated service providers with ATO records to identify individuals who may be failing to meet their registration, reporting, filing and/or payment obligations.”

Isn’t there an easier way to do this?

Chapman said one issue the federal government should consider as part of the Treasury review of the cryptocurrency legal framework is whether the tax treatment is appropriate.

“Right now we are trying to fit cryptocurrency treatment into an existing framework devised for other forms of assets,” he said.

“People who invest in cryptocurrency buy and sell quite often quite often.”

Chapman said some clients would come up with statements containing hundreds of lines documenting the purchase and sale of crypto assets, and the capital gain must be calculated on each individual transaction.

“I really think our cryptocurrency tax law should probably be looked at and maybe fine-tuned.”

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