Stiff ATO penalties for failure to declare crypto profits

Jun 01, 2021

Those who hold cryptocurrencies, such as bitcoin, as an investment are likely to receive a “please explain” from the Australian Taxation Office if they fail to declare when they are sold at a profit.

While the ATO’s treatment of virtual currencies is evolving as transactions become more common, it has made it clear that crypto investment profits are liable for Capital Gains Tax and failure to declare them in annual tax returns could result in stiff financial penalties.

The ATO has already contacted more than 100,000 taxpayers who have traded cryptocurrency over the past three years, reminding them of their tax obligations and to ensure that any capital gains from trading are included in their 2020-21 tax returns.

The ATO is collecting data from crypto exchanges and comparing it to amounts entered on tax returns to determine any tax liability.

Failure to declare crypto capital gains, where the ATO determines the taxpayer intentionally disregards the law, can attract a penalty of 75 per cent of the outstanding tax liability, plus the tax itself and interest on the shortfall.

With cryptocurrency prices rocketing and sharemarkets experiencing a major bounce in the past financial year, Adrian Raftery, founder of Mr Taxman, says many taxpayers will have big capital gains to declare in their returns this year.

Bitcoin, the leading cryptocurrency, was worth about $14,000 at the start of the 2020-21 financial year and is now changing hands for about $49,000.

The benchmark S&P/ASX 200 is up more than 20 per cent over the 2020-21 year.

A capital gain or loss can be realised if an investor converts a cryptocurrency’s worth into Australian dollars or exchanges one virtual currency for another, Raftery says.

While CGT applies to these transactions, individual investors still benefit from a 50 per cent discount on the tax if the crypto is held for at least 12 months.

If you make a capital loss, it can be used to reduce capital gains made in the same financial year, or in future years. Net capital losses cannot be offset against other income, Raftery says.

ATO rules state capital gains or losses can be disregarded if the crypto is a “personal use asset”, meaning that it is used to buy goods and services, rather than held as an investment.

The limit on holding crypto for personal use is $10,000.

Raftery says if crypto trading is performed as part of “carrying on a business”, then profits are required to be declared on the company’s tax return as ordinary income.

If the crypto is received for goods or services as part of a business, its value in Australian dollars would also need to be reported as part of its income, he says.

The ATO’s tax portal that individuals can link to their myGov accounts now flags if a taxpayer has disposed of crypto that may have resulted in a capital gains triggering event.

You need to keep good records of the date of each crypto transaction, its value in Australian dollars, what it was used for and who the other party was – even if it is just their cryptocurrency address.

Raftery says if you do a lot of cryptocurrency trading each year, calculating capital gains or losses for tax purposes can be difficult.

“I have found cryptocurrency tax software, such as CryptoTrader.Tax, saves time and stress,” he says.

Investors can simply download a CSV file of transactions from an exchange or crypto wallet and upload them into the software to generate year-end tax reports.

“Your accountant will love you,” he says.

Original article published here in The Sydney Morning Herald on 1 June 2021.

comments-rhsLatest Comments

  • "My partner and I are wanting to get married. Unfortunately he has alit of tax debt from when he was a teenager. How or will this affect our tax returns once married? "

    By: BM at Jun 05, 2021 2:14AM

    Post: Marriage

  • "Old thread, but have a related question... If I have a "Foreign LLC" registered in the US and am trading Futures on US exchanges using a US FCM/broker (but am an Australian resident for tax..."

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    By: Peter Andrew Sutherland at Mar 26, 2021 10:41PM

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