Recently, we’ve experienced an increase in clients coming to us with queries on cryptocurrencies.
Many clients ask, “what are the practical issues that can arise when investing in crypto?” These ‘issues’ often occur in two areas of the cryptocurrency market:
- When exchanging one cryptocurrency for another
- Record-keeping requirements relating to cryptocurrency transactions.
Exchanging one cryptocurrency for another
When you exchange one cryptocurrency for another, you dispose of one CGT asset and acquire another. Where you receive property instead of cash as part of a transaction, you are usually taken to have received the market value in Australian dollars of the property received.
You must compare the CGT cost base of the cryptocurrency item disposed of with the market value of the new cryptocurrency item obtained for all exchange transactions.
Records need to be retained for each transaction, in accordance with the record keeping rules, which means that each item is separately accounted for and recorded when it is acquired and disposed of, with relevant Australian dollar values recorded.
The ATO advises that it does not matter how many exchange transactions you undertake, as you will need to undertake this process for every transaction occurring during the income year.
The CGT record-keeping rules require taxpayers to keep records of anything that can reasonably be seen as relevant to working out whether you have made a capital gain or loss from a CGT event.
You will need to keep the following records in relation to your cryptocurrency transactions:
- date of the transactions
- value of the cryptocurrency in Australian dollars at the time of the transaction (which can be taken from a reputable online exchange)
- what the transaction was for and who the other party was (even if it’s only their cryptocurrency address).
To better understand these issues from the taxpayers’ perspective, the ATO considers:
- Are there any practical issues that arise in relation to the CGT record keeping rules, so far as cryptocurrency transactions are concerned?
- Are there any specific factors you think we should take into account when developing further public advice and guidance about CGT record keeping for cryptocurrency?
- Are there any practical issues in relation to complying with the taxation obligations that arise for each crypto-to-crypto transaction?
- Are there any specific factors you think we should take into account when developing further public advice and guidance about crypto-to-crypto transactions?
5 Frequently Asked Questions – and Answers!
The ATO have listened to taxpayers’ concerns and compiled the five most frequently asked questions surrounding crypto currencies, with a response to each:
|Issue 1:||Response 1:|
|In many situations, cryptocurrency transactions are not reasonably able to be accounted for on a transaction by transaction basis and the only reasonable approach is taxing on a fiat in and fiat out basis.||The normal record keeping rules under the tax laws apply to cryptocurrency transactions as with any other transactions involving the disposal of property. As part of our research, we discovered low cost software solutions that are able to both record each cryptocurrency transaction (including cryptocurrency to cryptocurrency transactions) and convert the value of the proceeds into Australian dollars.|
|Issue 2:||Response 2:|
|High fluctuations in values make it difficult to value cryptocurrency.||We heard that high fluctuations in value could create large changes in the ‘paper’ value of cryptocurrency portfolios, compared to realised gains. As cryptocurrencies are generally CGT assets, any gains are not realised until the time of disposal. This is an issue in all investments, and managing this risk falls into the realm of tax planning.|
Records have not been kept and we can’t reconstruct them now.
It was hard to keep records of high volume trades, particularly in ascertaining value for each trade.
Difficulty in accessing data required for proper record keeping.
|Response to Issues 3, 4 and 5:|
The normal record keeping rules under the tax laws apply to cryptocurrency transactions as with any other transactions involving the disposal of property. As part of our research, we discovered low cost software solutions that would be able to both record each cryptocurrency transaction (including cryptocurrency to cryptocurrency transactions) and convert the value of the proceeds into Australian dollars. The software can take information directly from the exchange or a digital wallet and do the calculations, which helps alleviate the issues with recording trades and accessing data. This type of software may be suitable for record keeping in cryptocurrency. Search “cryptocurrency record keeping software” for details.
In most cases it may be possible to reconstruct records through historical information available from Digital Currency Exchanges, wallet transactions or even normal bank account transactions. Market values of various cryptocurrency can also be obtained from a reputable online exchange.
With so many rules and regulations to become familiar with, the ATO appreciates that taxpayers may have difficulty understanding the various elements of their cryptocurrency guidance. Luckily, the ATO have now simplified their ‘Tax Treatment of Cryptocurrencies‘ information.
(For more information, visit Let’s Talk – ATO.)