Since the pandemic started there has been a surge of investment in cryptocurrencies. 2021 has seen record-high values and the ATO has taken notice. More so when it comes to capital gains made from trading in the currencies. Investors have been warned that the ATO will be looking to ensure capital gains events are being reported at tax time.
According to ATO assistant commissioner, Tim Loh, a taxable event is generated whenever a cryptocurrency is exchanged for another kind of cryptocurrency, or into sovereign money. When cryptocurrency is bought, it is considered an asset. Once sold, it, therefore, becomes subject to capital gains tax (CGT).
A capital gain is made when the amount made from the sale is higher than the cost base. Any fluctuation in the value of the cryptocurrency is not counted until it is disposed of. If the cryptocurrency is held for more than a year, the investor may qualify for a 50% discount on their CGT.
Where a net capital loss has been made, this can be used to reduce capital gains made in a subsequent year. It cannot be applied as a deduction on other incomes.
The cryptocurrency may also be classified as a personal use asset where the proceeds have been used for buying items for personal consumption. This may allow the transaction to be disregarded for tax purposes.
Another ATO assistant commissioner, Adam O’Grady, said that tax agents could make use of pre-filled data provided by the ATO to ensure accurate returns were being submitted. He confirmed that the tax office was collecting cryptocurrency data and noting sizable capital gains events. The tax office is reportedly working with designated service providers (DSPs) to identify buyers and sellers of cryptocurrencies and track their transactions.
Where returns would be submitted without accounting for these transactions, the documents would be held back and clarification from the tax agents and their clients would be sought. O’Grady added that both losses and gains should be reported. He noted that losses were often unreported but were still necessary to avoid the tax office having to perform follow-ups and could be applied to future capital gains returns.
The ATO has said that cryptocurrency investors are expected to keep records of their transactions. It has also warned that those dealing in forex and cryptocurrency in foreign countries may still face tax consequences.
It was noted back in March 2020 that as many as 350,000 crypto users received tax notice letters from the ATO. Industry experts expect future crackdowns to be harsher as the ATO tries to improve tax compliance in the country.