Site icon Forkast

Australian Tax Office warns: taxpayers on the hook for crypto tax earnings

ATO

ATO Commissioner Chris Jordan. Image: Sam Mooy/Getty Images, Envato Elements

Australian tax authorities are warning crypto investors to know their reporting obligations, and express concern over a lack of compliance and that many investors may not be aware crypto is taxed in a similar way to share trading.

Responding to questions by the Senate Select Committee on Australia as a Technology and Financial Centre, the Australian Tax Office (ATO) said it believes there is a great deal of misreporting about crypto trading in the country, driven largely by lack of understanding rather than deliberate non-compliance.

According to its guidance, private taxpayers are subject to the capital gains tax (CGT) regime any time they sell, swap or exchange cryptocurrency, and the net capital gain or loss must be reported in their income tax return. However, if taxpayers hold the cryptocurrency for at least 12 months they would be eligible for a CGT discount, and any gains or losses could be offset against capital gains made from other investments. 

The ATO also made clear the distinction between reporting obligations for individuals compared to business; whereby businesses must regard each disposal of cryptocurrency as a business activity and each item held as trading stock.

‘Long a subject of misunderstanding’

“Taxation of crypto trading has long been the subject of misunderstandings and the ATO’s response to the committee accords with our view of the tax laws relating to cryptocurrency,” Michael Bacina, a partner at Piper Alderman, who also sits on the board of Blockchain Australia, told Forkast.News. “There is a clear difference in reporting of gains between a person trading crypto as a business and someone trading in their capacity as an individual.”

The ATO recently launched a campaign to better educate Australians as to their tax obligations; last May it issued reminder letters to 400,000 residents just in time for the end of Australia’s financial year, which runs from July 1 to June 30. At that time, the ATO estimated that over 600,000 Australians had started investing in crypto in recent years, but with the level of excitement in the market since that time, that number is now likely to be much higher.

Newcomer investor Layton Holley of Sydney is indicative of the type of investor the ATO is trying to reach; when speaking to Forkast.News for this story, he said he was completely unaware of his taxation obligations prior to the interview. Furthermore, he thought his transactions on centralized exchange Binance were anonymous, unaware of the difference between peer-to-peer and exchange-based trading, and admitted he would later investigate the site for clarity on the topic.

“My initial reaction [to the news] would probably be confusion, not really knowing what to think about it,” said Holley, adding that he was not made aware of his obligations when he signed up to Binance and he still has a lot to learn about the technology and the industry. “As an entry-level person, I haven’t really gotten into it that far to really care about [his obligations].”

However, Bacina said the ATO has broad data-gathering powers and that anyone trading with a digital currency exchange in the country should assume the agency has access to those trading records  — which are also designed to make it easier for investors to report earnings themselves at tax time. While assessing the records for peer-to-peer and decentralized finance trading remains more difficult for the time being, he also believes as time goes on that the level of transparency between parties will also only increase.

As blockchain monitoring becomes more and more sophisticated,” he said, “tax authorities around the world will increasingly have greater visibility over trading activities of wallet addresses, and potentially the owner of those wallets when they are identified.”

There are other considerations Bacina recommends investors keep in mind that the ATO did not specifically mention in their recent statement, such as how non-fungible tokens may interact with people’s self-managed superannuation — or retirement — funds (SMSF). Current guidelines stipulate that SMSFs are prohibited from investing in art that can be used or displayed, which some NFTs could be considered. With the global NFT market increasing 315% month on month in August with US$5 billion in total sales volume, while this may sound like a niche point to make now, it is only likely to become more pressing as time continues.

“Anyone buying NFTs via their SMSF needs to be very careful not to breach the asset rules which apply to SMSFs,” Bacina said.

Can Australia keep up with global crypto developments?

The Senate Select Committee on Australia as a Financial and Technology Centre has been investigating how to best enable Australia to take advantage of blockchain and cryptocurrency technology for some time. While public submissions to the inquiry closed on June 30 this year, there have been ongoing hearings on the matter ever since, and the committee’s third and final report is due to be released by the end of this month.

Senator Andrew Bragg, who heads the committee, has said he hopes the committee can answer key questions; can Australia keep pace with global crypto developments and embrace the opportunities? And do we have the right consumer protections in place?

The committee has already revealed a great deal about the status of the industry in the country. In July, it was shown the Reserve Bank of Australia had been engaging with other central banks on the idea of a central bank digital currency (CBDC), though at that time, no such use case had emerged. The bank has been taking further steps towards CBDCs since that time however, posting a job advertisement for a CBDC research team last month, and announcing a collaboration with the International Bank of Settlements for a CBDC pilot project.

The second part of the committee’s remit is to investigate the issue of debanking of crypto-related businesses in the country, something Australia’s “Big Four” banks have repeatedly denied the practice of throughout the inquiry. Last month, however, two of those banks — National Australia Bank and Westpac — had to respond to renewed criticism for this very practice.

While taxation is not strictly part of the committee’s remit, Jonathon Miller, Australian managing director of crypto exchange Kraken, in an interview with Forkast.News said investigating the shifting landscape of how people hold and exchange value does have strong implications for tax. One aspect he would like to see addressed is beginning to treat cryptocurrency as currency as opposed to an asset.

“There are many opportunities for Australians to be employed gainfully and paid legally using crypto,” Miller said, “but the current guidance around crypto and payments to individuals as a wage are out of step with the functionality of the technology. It’s currently taxed as a fringe benefit, which is an onerous system for employees and a very costly system with a very high tax rate. [Kraken] would urge the ATO to kind of look at how they can recognize cryptocurrency as currency and allow payments to individuals in using crypto as wages [and] harmonize with how it would be treated if they were paid in Australian dollars.”

In his role at Kraken, Miller says the exchange — like most in the industry — does its best to educate their users and investors as a whole as to their tax obligations, and that when compared to the international standards, Australia holds up pretty well in terms of regulatory guidance.

“To be honest, Australia has done a good job of educating and providing guidance and leading with information rather than chasing people around with a stick,” he said. “So, I think we’re faring relatively favorably when it comes to that compared to some of the other jurisdictions that I’ve been made aware of.”