Cryptocurrency and tax: could you end up paying the ATO more than you earned?

As tax time approaches in Australia, cryptocurrency investors have been warned to begin working out what they owe.

Some lessons can be drawn from the recent US tax season, where some enthusiasts found themselves with a tax bill that exceeded their earnings after the recent crypto market crash.

Mark Chapman, director of tax communications for H&R Block, told Guardian Australia the company was expecting thousands of clients seeking help with their crypto investments this year, adding they tended to have at least some knowledge of their tax obligations.

But he is concerned about those who might not be aware of what they owe before finding themselves in the sights of the Australian Taxation Office.

“There are quite a lot of people, who don’t have tax agents, who simply don’t understand the tax implications at all,” he said. “They get into trading cryptocurrency and they don’t give any thought to the tax implications, and they simply don’t consider they have to disclose anything on the tax returns.

“Or there’s there’s an even smaller group who do consider it but decide not to include it anyway.”

Cryptocurrency is not taxed in the same way as interest earned on money in a bank account. For example, if you bought $100 worth of Bitcoin and it increased in value to $500, you don’t pay tax on it unless you cash out, use it for a purchase or exchange your Bitcoin for another cryptocurrency.

With the ATO indicating it will pay close attention to cryptocurrency assets this tax season, here’s what you need to know.

What tax do you have to pay on cryptocurrency profits?

If you cash out your cryptocurrency back into your regular bank account you’ll have to pay capital gains tax (CGT) on the money you made. Any capital gain you make will be added to your taxable income and taxed at your individual income tax rate.

You’ll also have to pay tax when you swap one cryptocurrency for another, use it to purchase goods or services that aren’t for personal use, and if you give it away as a gift.

You can use cryptocurrency to pay for personal use of goods or services up to $10,000, such as for a holiday or a car. But Chapman warned the ATO would be closely scrutinising these sorts of transactions to determine whether the end purchase was the sole reason for buying cryptocurrency.

Cryptocurrency transfers are taxed at the time they occur, so even if the currency has lost value you will owe tax on the amount exchanged or cashed out.

If you are a cryptocurrency trader rather than an investor, there is a 50% discount on the capital gains tax if you’ve held the investment for a year or more.

How to work out what you need to pay?

The ATO has a capital gains tax record-keeping tool it advises people to use. You’ll need to keep a record of how much you spent investing in the cryptocurrencies, and then what you gained when you sold it.

What about NFTs?

If you have bought into the hype around non-fungible tokens, whether it be a “bored ape” or the Australian Open’s dalliance with NFTs, those too are considered investments, and any profits are treated the same way as cryptocurrency profits.

What if I don’t declare it?

If you don’t declare your cryptocurrency profits, you could get in trouble with the tax office. The ATO has been collecting data on cryptocurrency transactions and account information from designated service providers since the 2014-15 tax year and it’s data-matching operation continues this year.

According to the ATO website, “the data obtained will be used to identify the buyers and sellers of crypto-assets and quantify the related transactions. We will match the data provided by designated service providers against ATO records to identify individuals who may not be meeting their registration, reporting, lodgment and/or payment obligations.”

Isn’t there an easier way to do this?

Chapman said one issue that the federal government should consider as part of the Treasury review of the legal framework around cryptocurrency is whether its tax treatment is the right fit.

“At the moment, we’re trying to shoehorn the treatment of cryptocurrency into an existing framework was devised for other forms of asset,” he said.

“People who are investing in cryptocurrency are very often buying and selling quite frequently.”

Chapman said some clients would come in with statements that included hundreds of lines documenting purchase and sale of crypto assets, and the capital gain has to be calculated on every single transaction.

“I think really our tax law with regard to cryptocurrency probably does need to be looked at, and maybe just fine-tuned.”