In an announcement on 16 May 2022, the Australian Taxation Office (ATO) released its four priority areas for ‘Tax Time 2022’ which are:
- record-keeping;
- work-related expenses;
- rental property income and deductions; and
- capital gains from crypto assets, property and shares.
The ATO has identified these priority areas due to regular mistakes made by taxpayers in lodging their tax returns.
Whilst the first three areas have well established principles in place to guide taxpayers, the principles regulating crypto assets may be unknown or unclear to the everyday taxpayer, especially when casually dabbling in crypto assets.
The ATO’s announcement indicates that this must change as it will not be acceptable to plead ignorance if a taxpayer fails to record a capital gain or capital loss on crypto assets.
ATO Assistant Commissioner Tim Loh specifically addressed this priority area, stating:
“Crypto is a popular type of asset and we expect to see more capital gains or capital losses reported in tax returns this year. Remember you can’t offset your crypto losses against your salary and wages…
Through our data collection processes we know that many Aussies are buying, selling or exchanging digital coins and assets so it’s important people understand what this means for their tax obligations.”
The ATO’s guidance for practitioners and taxpayers in this area is not without its own ambiguities, with their publication on ‘Tax treatment of cryptocurrencies’ (last updated on 30 March 2022), outlining that any reference to cryptocurrency will refer to Bitcoin or other digital currencies similar to Bitcoin.
Cryptocurrencies (like Bitcoin) and non-fungible tokens (NFTs) almost exclusively exist and operate on blockchain technology. As it stands, these assets will generally fall under the scope of capital gains tax (CGT) regime and CGT may apply where the asset is disposed by:
- selling for fiat currency;
- exchanging one cryptocurrency or crypto asset for another;
- gifting crypto assets;
- trading crypto assets; or
- using cryptocurrency to pay for goods or services.
However, in certain circumstances the acquisition of cryptocurrency or crypto assets may be treated as ordinary income where:
- isolated cryptocurrency transactions have been entered into for the purpose or intention of making a profit and the transaction has been undertaken in a “business like” manner;
- an employee receives part of their normal salary or wages as cryptocurrency or crypto assets; or
- a taxpayer receives payment for services in cryptocurrency or crypto assets.
The eligibility to claim expenses or deductions related to crypto assets will also vary depending on whether a crypto asset falls under the CGT regime or is ordinary income.
For example, a tax deduction may be available where the crypto assets are used to generate ordinary income. However, where the asset is taxed under the CGT regime, expenses may form part of the cost base of the asset.
Where crypto assets are treated under the CGT regime, taxpayers may be eligible for more favourable tax treatment (such as the availability of the 50% CGT discount where the asset is held for 12 months or more).
Crypto assets, by nature, are constantly evolving and challenging the historical definitions and application of the tax legislation. As this market rapidly expands, Bitcoin cannot continue to be a generalised comparison for digital currencies and NFTs. With this in mind, the ATO continues to expand its efforts to examine the acquisition and disposal of crypto assets through its data-matching program and we expect this focus to increase as these types of assets become more widely used.
It is also a timely announcement by the ATO given last week’s ‘Crypto Crash,’ during which billions of dollars’ worth of Bitcoin was liquidated. Forbes estimates that in the last month, $1 trillion has been wiped off the crypto market.
Ultimately, the ATO’s announcement has made one thing clear about crypto assets: taxpayers will have increased scrutiny on the purchase and disposal of their crypto assets this tax time.
It is crucial that investors keep accurate records of their crypto assets for the purposes of completing their tax returns. In this rapidly evolving environment, it is important for investors to seek independent tax advice about their crypto assets to ensure they are not caught out in their tax affairs.
For more information, please contact our Corporate advisory and governance or tax teams.