Planning to fund your next holiday by cashing in some of your cryptocurrency holdings? No problem – but don’t forget to put some aside for the tax man.
That’s the warning from accountants as the Australian Taxation Office (ATO) ramps up its scrutiny of investors in Bitcoin, Ethereum, Monero and other of the more than 1600 cryptocurrencies currently being traded online.
Despite reports of its unpredictability, Bitcoin is trading at nearly seven times its value in April 2017 – fuelling mainstream media reports of luxury holidays and his-and-hers Lamborghinis that have drawn mum-and-dad investors out of the woodwork.
Those that do extricate real earnings will find the ATO expects its fair share – and if the earnings are significant, they may even be pushed into a higher tax bracket than with their other personal income.
The ATO “doesn’t have to introduce new rules for these things”, says Liz Russell, senior tax manager with online tax firm eTax Accountants. “Bitcoin is not considered to be a currency at all; it’s considered to be an asset or, if you’re a trader, it’s stock.”
“We have definitely had people come saying that they’ve bought Bitcoin and they’re going to make quite a lot of money, and how can they not tell people about it?”
“Our advice is to pay your tax on it, deal with it properly, and keep doing it to make lots more money.”
Keeping up with the crypto
Just what constitutes “proper” dealing with cryptocurrency, however, is not necessarily on the minds of many of the people that have rushed to dabble in cryptocurrency.
As the ranks of the crypto-rich have swelled – a recent survey of 2000 Americans by US credit-scoring firm Credit Karma and research firm Qualtrics suggested 57 percent realised cryptocurrency gains last year – tax authorities around the world have been rushing to stake their claims.
Their goal: to shine a spotlight on those who feel cryptocurrencies offer a way to bag big profits outside the watchful eye of tax authorities.
Anecdotal reports suggest that most taxpayers have been less than forthcoming: Credit Karma noted that of 250,000 people using the platform to file their taxes with that country’s Internal Revenue Service (IRS), fewer than 100 people had reported capital gains on cryptocurrency holdings.
Cryptocurrencies continue to change hands at a furious pace: more than $US4.2b ($A5.5b) of Bitcoin alone changed hands on a recent June day, for example, with Tether ($US2.5b or $A3.3b) and Ethereum ($US1.8b or $A2.4b) also moving briskly.
Many of these transactions represent capital gains events, with estimates suggesting that US households alone likely owe $US25 billion ($A32.7b) in capital gains taxes for their cryptocurrency holdings.
Little wonder tax authorities have ramped up their pursuit of cryptocurrency investors. The UK’s HM Revenue and Customs office, for one, published guidance on the tax treatment of cryptocurrencies in early 2014.
This February, digital currency exchange Coinbase reported to users that the IRS had served it with a summons for detailed information – including taxpayer ID, name, birth date, address, and historical transaction records between 2013 and 2015 – related to around 500,000 customers.
Coinbase fought the request and February court judgement saw it release details related to 13,000 “higher-transacting customers” in what the exchange called “a partial, but still significant victory”.
In February, the Australian government launched its own crackdown on digital currency exchanges, with new laws establishing industry regulations on par with those applied to more conventional financial exchanges.
The right sorts of records
Heightened ATO scrutiny has motivated accountants to brush up on their cryptocurrency skills: “We’re trying to get a handle on how much information the tax department has – and can get – in relation to what people are doing with cryptocurrency,” Russell says.
The ATO published its guidance on the handling of cryptocurrencies in March, warning that “everybody involved in acquiring or disposing of cryptocurrency needs to keep records in relation to their cryptocurrency transactions.”
The “right sort of records”, Russell advises, would necessarily include dates and times of every cryptocurrency transaction; the value of the transaction in Australian dollars as well as the cryptocurrency at the time the transaction took place.
Another key thing to document, she says, is the intent behind the cryptocurrency activity – which needs to be established when you start buying cryptocurrency, not retrospectively at tax time.
“If you want to count your profit or loss on the trades you’re doing in cryptocurrencies, you have to keep records like any other trader does. It’s either a profit transaction, or an investment transaction with capital gains and losses,” she said.
Traders of cryptocurrency – those who regularly buy and dispose of assets to realise short-term gains – can treat cryptocurrency as stock of trade, and can apply cryptocurrency losses against their taxable net capital gains because the cryptocurrency is treated as an income-producing instrument.
More casual investors, who may hold onto their cryptocurrency for a year or more, will have any profits from the sale assessed as income.
If a person borrows money to buy cryptocurrency, the interest on that money is not claimable as a tax deduction, she added – but that expense can be added to the cost base of the capital asset when subsequently calculating the taxable capital gains. Costs associated with mining cryptocurrency are not deductible either.
As with all financial matters, it’s best to talk with your accountant for tax guidance if you’re dabbling in cryptocurrency. That way, you’ll be ready when the ATO comes knocking – drawn, potentially, by your sudden splurges on ridiculously expensive cars or holidays.
“The ATO is taking a much stronger interest than it has appeared to do in prior years,” Russell said.
“With IT as it is, they can see a lot of things that you don’t imagine they can see – so there probably aren’t a lot of things that can’t be found.”