ATO set to decrypt the tax treatment of cryptocurrency in increased audit activity

Contrary to popular belief, transactions involving cryptocurrencies such as bitcoin are not always anonymous.

The ATO is set to audit transactions involving cryptocurrency in the coming months. The ATO has wide access to information about cryptocurrency transactions thanks to their sophisticated data matching system and increased access to overseas data under the Common Reporting Standards.

Taxpayers need to ensure that cryptocurrency transactions – both gains and losses – are properly reported in tax returns.

How are trades in cryptocurrencies taxed?

The ATO’s view is that cryptocurrencies are assets for CGT purposes. This means that any bitcoin trade, for example, is a CGT event. The tax consequences depend on whether the trade is on:

• revenue account – where all profits or losses are included in a taxpayer’s ordinary income; or
• capital account – where any capital gain or loss is included in calculating a taxpayer’s capital gain for the year, which may be reduced by applying CGT concessions.

Where taxpayers buy or sell goods and services using cryptocurrencies, there may be two taxing points:

• when the goods and services are bought and sold; and
• when the cryptocurrency is converted into traditional currency.

What are the practical issues?

One of the biggest issues for taxpayers will be proving that they have reported the correct amount of tax. This may be difficult because ordinarily, cryptocurrency exchanges do not provide a document showing details of each trade.

Taxpayers will need to keep their own records about the:

• date of each transaction;
• value of the cryptocurrency at the time of each transaction;
• parties in each transaction; and
• purpose of each transaction.

This information will be vital in any audit or review because it is the taxpayer who must show they have paid the correct amount of tax. It is not up to the ATO to determine this: the ATO can issue an assessment for any amount of tax and this will stand until the taxpayer proves the correct amount of tax.

There are additional practical issues where one cryptocurrency is traded for another. This is because trades are not just taxable when they are converted to traditional currency. Taxpayers will need to be able to demonstrate the value of this cryptocurrency trade in traditional currency at the time that the trade was made.

What do you need to do?

Taxpayers who have sold cryptocurrency in the 2018 income year should consider whether this should be included in their taxable income before they lodge their income tax return.

Taxpayers who are looking to get ahead of any audit and who have not disclosed their cryptocurrency trades in previous income tax returns can make a voluntary disclosure. This can significantly reduce penalties charged by the ATO.

When making a voluntary disclosure, taxpayers must meet the specific conditions of a ‘voluntary disclosure’ under tax legislation. If these conditions are not met, there may be no reduction in penalties and interest.

If the ATO has already started an audit, taxpayers need to gather all the necessary evidence and manage their responses to the ATO.

Please contact a member of our team if you would like to discuss.