Cryptocurrency – the name given to digital currencies powered by Blockchain technology – has been all over the news recently. The popularity of cryptocurrencies has been building steadily over the last decade, but the last 12 months have seen them explode into the mainstream in a big way.
Whether it’s Elon Musk’s tweets sending markets spinning, or China banning Bitcoin for financial institutions, you’d be hard-pressed to avoid hearing media spin about crypto these days. The volatile nature of the cryptocurrency market & the disruptive potential posed by the new technology has well & truly grabbed the public’s attention.
With a reputation for creating instant fortunes – and sudden, devastating losses – there’s no shortage of different voices out there, all shouting over each other to give you their crypto investment advice.
All we’ll say is that if you’re planning to enter a high-risk market like crypto, make sure you’ve got all your other bases safely covered first. Don’t go staking your business or family security on a largely unregulated market that could tank tomorrow.
We’ll be talking more about crypto markets in the future, but today we’ve decided to focus on something pragmatic that most people overlook when they’ve got dollar signs in their eyes – properly managing your crypto compliance and not falling foul of the ATO. They’ve been very clear that they’re watching crypto closely this year.
Regulations are struggling to keep up with the emerging technology, and you’d be surprised how many crypto investors get in the way too deep before realising they’ve got compliance obligations & taxes to pay.
Make sure you’re on top of exchange rates & international regulations
Cryptocurrency is a global phenomenon, with mines & exchange platforms springing up all over the world. This means that you need to be aware of fluctuating global exchange rates, and regulations around international investments. It’s also important to remember that you still have to pay tax on your crypto, even if it’s not held in AUD.
In many countries, cryptocurrency is not yet seen as legal tender. If you have dual citizenship or do business in multiple countries, you need to check those national regulations to see how they apply to you.
The varying standard of international regulations also means that many foreign crypto platforms are often scams. The ASIC website provides some great tips on identifying when a crypto investment doesn’t look legitimate.
If you want to trade within Australia, make sure you pick an exchange platform that operates locally and accepts AUD as a currency. If you don’t, you could end up stuck paying all sorts of hidden conversion fees. Often, this involves taking a steep cut from each of your transactions. It’s another thing that can add up over time if you’re not aware of it.
Watch out for the Capital Gains Tax.
This is the biggest one. If you’re planning to trade crypto but you don’t understand the Capital Gains Tax (CGT), you could be heading for trouble. In most situations, cryptocurrency is treated as an investment asset, like property, so the CGT will apply to any gains you make on your investment. According to the ATO, you’ll generate a ‘CGT event’ every time you sell, trade or gift cryptocurrency.
For instance, if you buy a bitcoin at $300, that $300 amount is its ‘cost base’. If you sell it less than a year later at $500, then you’ve made $200 in capital gains – which gets added to your total taxable income. If you held the asset for more than a year before the CGT event, you’re eligible for a tax discount – so if you sold it for $500, you’d discount that $200 capital gain by 50% and only add $100 to your total taxable income.
It’s a simple formula, but it can get pretty hard to keep track of once you’re undertaking hundreds or even thousands of transactions. We’ve also noticed that people often don’t sell the same stock they initially bought, or they make a number of confusing microtransactions.
If you don’t accurately record these at the time, your accountant will struggle to make sense of them. They’ll either say no outright, or charge you a much higher fee for the trouble. It’s important to keep comprehensive records of every single crypto transaction or gain that you make, or you could end up facing a big shock at tax time.
Crypto miners, or those who are paid in crypto, may also face other income tax obligations. It’s worth checking out the ATO’s website for a breakdown of when the different rules apply. If you’re serious about getting into consistent crypto trading, then it’s probably worth seeking out some financial advice.
Don’t try to hide or ditch your crypto at tax time – The ATO will know.
Because it’s an emerging technology, there’s a common misconception that cryptocurrency trading is largely anonymous or easy to hide. This couldn’t be further from the truth. The blockchain – the digital technology that crypto runs off of – records each of your transactions permanently.
Exchange platforms are also required by Australian law to be registered, which means that the ATO already has a clear record of any transactions you’ve made on that platform.
On top of this, the ATO recently confirmed that they’ll be using data-matching this year to crack down on cryptocurrency traders. They’ve warned that the software will identify & cross-reference the account & transaction details of the buyers and sellers of crypto-assets, with the Tax Office expecting records relating to 400,000 to 600,000 individuals to be obtained each year.
Another common strategy that people use to try and hide their gains is to gift or dispose of their crypto holdings right before tax time so they can claim a loss – only to buy it all back at a similar price as soon as their tax has been filed.
This is called a wash sale. It’s popular in the volatile crypto market, and it’s also illegal. The ATO can easily detect this sort of strategy in an audit, and if you try it and get caught, you could be looking at heavy fines or possibly even prison. Just don’t try it. It’s better to be smart about crypto compliance from the very first trade, and take steps to be prepared before tax time hits.
If you’ve invested in crypto, or you’re considering getting started, then let us know today. We can help you understand the market and develop smart investment strategies, manage your cryptocurrency tax compliance, or better integrate your trading practices with your current financial situation. We’re here to help.
Disclaimer: This advice is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider whether this advice is suitable for you and your personal circumstances before acting on it.