When it comes to tax time, cryptocurrency is an area often fraught with underreporting and broad misunderstanding. The ATO is implementing stringent measures to capture lost income tax revenue, which includes hundreds of thousands of taxpaying Aussies. Over the next several weeks, the ATO will notify some 350,000 people that their cryptocurrency earnings and trading must be accounted for in their upcoming tax declaration to avoid penalties and the potential for prosecution. The ATO will remind crypto traders via letter or email that cryptocurrencies are forms of property and should be regarded as assets for capital gains during tax time.
How does the ATO view cryptocurrencies?
In essence, a cryptocurrency is viewed as a form of property (like real estate or company shares) and therefore any incomes earned from trading in these digital currencies should be documented and accounted for in your tax declaration and subject to the tax on capital gains.
What cryptocurrency activities does the ATO consider?
If you are the owner of digital currency and you are using this digital currency to trade, then you may need to report these activities to the ATO. These activities include:
- Selling cryptocurrency
- Trading cryptocurrency
- Exchanging cryptocurrency
- Converting cryptocurrency to Australian Dollars
- Converting cryptocurrency to foreign currency
- Using cryptocurrency to purchase goods or services
How can I avoid misreporting cryptocurrency trading?
Best practice of recording transactions and keeping receipts of trading activity should come as no surprise to taxpayers using cryptocurrencies. If you want to ensure accuracy in your declaration, make a record of all transfers and purchases in digital currency. For example, keep records of exchanges, professional costs associated with these exchanges (such as legal or accounting fees), as well as records of your digital wallets. Be specific about the date and dollar value of these transactions and between whom they took place. Procrastinating will not make the ATO disappear – it will only make the job more cumbersome come tax time.
ATO Tax audit – can you afford it?
The ATO has consistently said that it will be utilising more advanced measures to ensure all Australians are meeting their taxation obligations. Last April the ATO released its Data Matching Protocol for cryptocurrency under which it receives detailed transactional data from every digital currency platform spelling out who is transacting and what users transacted on their exchanges.
Government funding aimed at closing the income tax gap has enabled the ATO to set up and deploy taskforces to ensure crypto traders are fully educated on their duties to pay tax. Given the complexity and relatively unique nature of crypto trading, the ATO is attempting to make these traders aware of both their rights and obligations, and will afford them reasonable time to correct any oversight, underreporting, or accounting errors.
Your capital gain could be the ATO’s tax loss
For crypto traders who were active in the 2017/18 financial year, the ATO intends to send notices to review the accuracy of their capital gains reporting detailed in their tax declarations. The ATO has shown some leniency in stating that no penalties will apply to crypto traders who promptly and accurately correct their tax declarations. Otherwise, those who fail to correct their mistakes may face the full force of an ATO tax audit.
For cryptocurrency owners not active in trading, the ATO will send a notice reminding and educating them of their taxpaying obligations with guidelines on best practice in record keeping.
Unfortunately for taxpayers, no guarantee exists to avoid an ATO tax audit. The ATO has more resources than ever before, and extensive investigatory measures like tax-collecting taskforces are now possible.
Honest mistake or deliberate avoidance?
According to the ATO, the issue of cryptocurrency has been on its radar for years with efforts ramping up over the last 12 months. A widespread misunderstanding on the part of Australian taxpayers is the idea that cryptocurrencies operate in the dark, and that the identities of traders and their transactions are somehow inaccessible to the ATO. In reality, while cryptocurrencies are traded virtually in an online environment, the ATO is directly plugged into these exchanges, and regularly receives information regarding users of its platform.
While most traders in company shares are aware of their capital gains tax obligations, some regard cryptocurrency as exempt or somehow different, when in fact they operate in much the same way.
How to respond to ATO cryptocurrency notice
While the ATO sends out thousands of notices to taxpaying Australians that are owners and traders of cryptocurrency, it is also affording a one-month window to ‘self-correct’ any oversights or discrepancies. Recipients should think carefully about whether or not they received any income from cryptocurrencies to ensure they appropriately amend their tax returns.
By ignoring this warning, taxpayers risk additional interest payments, on top of the professional fees incurred in correcting their mistakes.
Unfortunately, the ATO’s strong stance against tax-avoiding behaviour means that even the most diligent and forthcoming taxpayers may be subject to a full-fledged tax audit this year.
Is Audit Insurance the answer?
AuditCover have digitised and streamlined the process of acquiring protection for accountants and their clients through their audit insurance service. Whether you own a business or provide financial advice to business owners, audit insurance is now a cost-saving measure that all Australians should seriously consider in this ever-more vigilant tax environment.