Is cryptocurrency tax-free? Can the government tax cryptocurrency? Can the ATO see my crypto transactions?
Cryptocurrency has made many people a bucket load of money. But it hasn't always been declared before... Has it?
The ATO has legislation in place on crypto going back to around 2014 when mainstream interest in crypto started to rise.
I would say there is a lot of profit that hasn’t been declared in the past, especially in the earlier years. However, we continue to get more clients who have bought and sold during the year, and have dealt with the appropriate tax on their profits made.
There has been a misconception in the past that profits made from cryptocurrency, are beyond the tax system. That has definitely been part of the appeal. But, you definitely must declare it.
Have people dealing in cryptocurrency had to pay tax before?
Technically, yes. And you always should have. It's treated the same as any investment - the same as buying shares in Telstra, setting up a managed fund, or buying a rental property.
In most instances, you need to pay 'Capital Gains Tax' on your crypto profit after you buy it. It also works the other way. If you have bought crypto and then sold as a loss (and there are a few of us who have) you are allowed to record the loss in your tax return. The only exception would likely be unless you are in the business of crypto mining or running a platform. This is a whole different kettle of fish.
It's treated the same as any investment - the same as buying shares in Telstra, setting up a managed fund, or buying a rental property.
The situation changes if you buy one type of crypto, and then trade it for another type (and don’t convert it back to cash during the change). There could be tax to pay depending on the difference in the value of the two coins. This is much harder to calculate and to track this. It does get a bit fuzzy here!
If you only bought cryptocurrency to transact with businesses and not as an investment, these could be tax-free for purchases up to $10,000. But there is a lot of rules about this. The longer you hold onto the cryptocurrency, the less likely you can get away with this. If at any point you were considering using the crypto to make a profit, this is treated as an investment and must be taxed.
If you're stuck, the ATO has great examples listed on their website here.
Is it still something we should consider dabbling in?
Several years ago there was a big rush and talk of crypto replacing normal currency. Others believed it would continue to skyrocket in price, and didn't want to miss out. However, after seeing it move over a few years, a lot of coins are too volatile and difficult for use or replacement of currency. For both the buy and seller, trying to transact with something worth + or - 10% or more per day (or sometimes worse), there is a risk using crypto for anything.
For example, in the very early days of crypto (2010), there was someone who traded 10,000 bitcoin for a pizza. For concept, 1 bitcoin as of this morning is around $15,500 AUD. So that’s now worth $155 Million today. I sure wouldn’t want to be that guy, but I hope it was a good pizza!
But, on the flipside, bitcoins have been as high as $26,000 back in 2018. So if you’d bought it in then you’ve lost almost half of your money to now. There’s also been a lot of coins in crypto that have become defunct – thus if you invested in them you would have lost all your funds.
I think due to the volatility and risks associated, we are seeing that people may carry a bit of crypto for fun, but it’s usually not the main parts of their portfolio (for most people anyway).
So what's changed this year?
To be honest, nothing has really changed on the handling of crypto, it’s just more that the ATO are collating and data matching more of the information they are receiving, and making tax agents such as ourselves (and yourself if you lodge an E-tax through Mygov) aware of the information they have when preparing the tax returns.
Is it true that the ATO now has access to cryptocurrency transactions?
I would say yes. As tax agents, we can see on our business portal that a client "has cryptocurrency transactions that may have to be declared". This gives us very limited information but does confirm that they know. So, you can probably be safe in assuming they have some information, and to report this on your tax returns. Especially if you are lodging on your own, and not through a tax agent. You could be red-flagged if you lodge without declaring any, but it's been reported elsewhere on their records. It is up to you or your tax agent to quantify the gain or loss that has occurred and what needs to be done.
The ATO would be matching data from accessing financial and other records, for example: seeing funds transferred out of an account to a known crypto platform and then return of funds from the same platform to the accounts at a later date. But, the information could also be reported from the platform that you hold your crypto in directly. This is the online provider who accepts the cash and converts it to your digital wallet in your chosen crypto. The ATO has a data matching protocol in place with these platforms operating in Australia. This was put in place in the past two years, but they are seeking information on transactions all the way back to 2014.
However, the crypto industry is very unregulated. Your chosen platform may be overseas and therefore are not required to provide information to the ATO, or the platform is just not currently complying with the ATO on their records.
If you were required to provide a lot of personal details to your platform (like your DOB, full name, tax file number or personal identification documents like drivers licences and passports) and it’s Australian based, it’s likely that the ATO will be receiving information on the transactions from that platform.
What types of reactions do you get from clients after they discover their cryptocurrency transactions are already picked up by the ATO?
They usually are a little shocked for sure! This again stems back to the misconception that it’s beyond the system.
The ATO doesn’t provide us with the details of what they have. Matching bank account transactions with a crypto platform would be how they source this information.
The ATO is a lot more technology-savvy. They have access to your bank accounts and most transactions to see any income going in or out. Is this a good thing do you think?
Actually, the ATO has had these powers from financial institutions for a quite few years now, we’ve seen many examples of this over time.
But the ATO are now 'data-matching' from government departments and other third parties (such as Centrelink, banks, stock exchanges, crypto platforms, office of state revenue for property sales, Queensland transport for vehicle registrations, etc). So from that, the system seems to be getting more automated and connected.
I think in a lot of cases it’s a good thing. A big change we saw this year was matching information from single touch payroll (STP) for employees (so no more payment summaries are given by employers). This has meant that all taxpayers payroll information is reported to the ATO at each pay run, so any employers that don’t or aren’t going to pay superannuation for their employees are found out almost immediately (usually about a month of being late). This allows the ATO to chase these businesses for outstanding payments fairly owed to their employees. It also makes it easy for the ATO to see if there are any issues with year-end wages reported to the records received during the year, making it a lot more accurate to get it right the first time.
However, there are a few cases where this data matching and automation can cause issues. For example, where a transaction isn’t taxable and/or the information received by the ATO from another department is not correct, these cases usually require a lot of our time to prove it to the ATO that the data received is false and/or not necessary.
Will it now be harder for people to rort the system?
Absolutely. The more information that the ATO is matching, results in fewer places for people to hide funds and profits. Crypto has definitely been an area where a lot of people believe it's off the grid’ so to speak, but the ATO is catching up in this area and will continue to do so over the coming years.
Director & Business Advisor
Pete has a Bachelor of Commerce from University of New England and is a Chartered Accountant. He has over 20 years experience in Public Practice, specifically in Business Services; Virtual CFO, Advisory for SME’s, Audit, Business Valuations, Strategic Planning, IT Focused Solutions and Taxation.